Stock Market Rallies On Fed Rate Hike
In this article:
- Is rally setting up a short squeeze?
- Which bull opportunities are left standing?
- Swing trader embraces day trading
All eyes in the trading world were on the Federal Reserve (Fed) announcement Wednesday and plans to increase the benchmark interest rate.
Based on the Fed announcement, the market rallied into the close after the rate hike news.
The Fed justified the historic rate hike – .75% – as a means to curb rising inflation. This is the highest rate hike in three decades.
And there is more to come by the end of the year.
(Check out the free video, above, for insight into trading this changing market.)
Market gets a bounce on Fed rate hike
It’s about time for the Fed rate hike, according to John Carter, Founder of Simpler Trading.
“That (rate hike) will shake the markets up and then everything will stabilize,” John stated to Simpler Trading members. “Inflation is becoming a huge problem for the government and the government doesn’t like problems so they wanna try to get rid of that.”
Current market forces are colliding to produce the fastest fiscal tightening in history with the U.S. dollar, commodities, and interest rates all going up at the same time, John explained.
“They rarely go up together and never at the rate they are going up now,” John said.
As an example, U.S. mortgage rates spiked from about 3% at the beginning of the year to 6.5% before the Fed announcement. Buyers are losing interest (now at a 22-year low) in home purchases as mortgage rates rise. This has fueled fears of a housing market crash, although John doesn’t foresee a fallout at the level of the 2008 housing and financial crisis.
Unemployment is another fear coupled with interest rates rising as companies wrangle with expenses. Layoffs in technology and cryptocurrency companies have already begun.
While the Fed rate increase is historic, traders may have history on their side in the coming days.
John explained how the three days leading into the Fed meeting today have all been down days in the stock market. This has happened 25 times since 1990 with 21 of those periods resulting in the market moving higher after the Fed meeting.
The market responded in this historical context on Wednesday. After a jump higher at the open, all three major indexes slowly moved down until after the Fed meeting when all three rallied higher.
The Dow closed at 30,668.53 points to gain 1% (adding 303.70 points on the day). The Nasdaq rallied the highest to 11,099.15 points for a 2.5% spike while the S&P 500 bounced back by 1.46% to 3,789.99 points.
Will the market rally continue?
John is watching the market cautiously when there is no certainty history will repeat itself this week.
“Remember, the name of the game is to protect what you have and be patient for the opportunities that give you a high probability for success vs. betting it all and hoping,” John said. “There’s no reason to be making any big bets here as far as I can see.”
Simpler’s traders are also watching the flip side of this “positive” market reaction today. Often the “real” move follows the day after a Fed event and a short squeeze could be brewing.
Short squeezes are generally triggered by unexpected good news (such as the Fed fighting inflation with higher interest rates). A short squeeze in the stock market occurs when prices increase and trading volume spikes as short sellers exit their positions to cut losses.
“Thursday could be insane,” John said. “So be aware that this is going to be kind of a crazy week.”
Find a trading mentor for this bear market
If you are looking for a trading mentor who has “been there, done that” then consider getting to know John Carter, Founder of Simpler Trading. John, best-selling author of Mastering The Trade, delivers his unique style of trading and strategy with a focus on consistent income results.
John developed our community of like-minded traders because he wanted to share his growing pains and successes over the past two decades. Gain access to live-trading sessions, real-time stock alerts, and learning how a professional trader works this volatile bear market. Get started today.
Is there a bull still standing?
John isn’t all pessimistic about this market.
Swing trades are not in his trading plan at the moment due to the day-to-day volatility. He is working more day trades to catch opportunities in the rips and rallies of price action.
Arguably the last bull standing in this market is oil.
Oil is holding its own at a higher price – good for traders, bad for consumers – and expectations are that price levels are topping out. The Fed wants oil to drop because it may prompt less inflation more so than any monetary policies.
“For the Fed to be happy, oil needs to implode,” said John, who expects oil to move toward the 200 simple moving average.
John is also watching the “biggest bull market that’s happening out there right now” that is not on the radar of many traders.
Interest rates – CBOE 10 Year Treasury Note Yield Index (TNX) – are the highest since 2010. With the latest Fed rate hike and plans through the end of the year (possibly another .50-1.25%), this bull ticker inside the chaos may offer opportunities for savvy traders.
Any catalyst like the Fed rate hike can set the market rushing up or down. Traders have to work harder in these choppy conditions to find potential trade setups.
Is day trading an option for you?
All the chaos of this market has created a new level of stress for traders.
One strategy to consider is day trading. While day trading is considered a higher level of risk, the team at Simpler Trading understands what traders go through when the market maintains an extended level of uncertainty.
Simpler Day Trading allows members to follow experienced traders as they “get in, get out” with trades that limit capital exposure. What is appealing to traders in this market is the community of professional traders delivering live-trading insights during market sessions.
Avoid the stagnation of trading alone, and check out this daily training and learning option.
Inflation, interest rates hot for summer
The Fed on Wednesday said the government understands the hardship of rising inflation and plans to bring down inflation as fast as possible.
The cost of higher inflation and interest rates means consumers will pay more for borrowing and spending – mortgages, car loans, credit card interest, and day-to-day goods and services.
The days and months ahead will be tough financially for consumers, and traders must work within this economic environment that will continually affect the stock market.
Trading through summer will be hectic with wild swings. Simpler’s team of traders will continue to deliver insights into how to work through the obstacles along the way.