Traders Switch Gears As Fed Hikes Rates
A string of 75 basis points interest rate increases ended, but this long stretch of inflation fighting is far from over as the Federal Reserve (Fed) is holding to hawkish hikes.
Central bankers raised the federal funds interest rate by 50 basis points on Wednesday, and they plan to continue rate hikes into 2023.
Early positive gains across the board in the stock market cash session today were erased as soon as the latest rate hike was announced.
Stock market sinks on Fed rate hike plans
The Fed announced Wednesday that it plans to continue raising interest rates indefinitely.
The Federal Open Market Committee (FOMC), or central bank, hiked benchmark interest rates another 50 basis points, or .50%.
This pushed the federal funds rate to a range of 4.25% to 4.5%. This is the highest funds rate in 15 years, and the rate was just above zero in March. This was the seventh interest rate hike this year from the FOMC, including .75% rate hikes in a row.
The stock market reacted quickly, losing gains from earlier in the day.
In the market today, the Dow closed at 39,966.35 points to fall .42% (dropping 142.29 points on the day). The Nasdaq dropped to 11,201.83 points for a .49% tumble while the S&P 500 missed breaking even by .38% to 4,004.57 points.
Traders should expect more of the same from the FOMC into 2023, or until the Fed hits its 2% core inflation target. Core inflation currently stands at 6%.
“The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run,” according to a statement from the central bank. “The Committee anticipates that ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time.”
“The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals,” according to the statement.
Fed Chairman Jerome Powell held to that hawkish stance in his afternoon press conference.
“While it was good to see inflation come down these last two months, the Fed will need to see a few more signs over a longer time frame that inflation is under control before a full pivot,” Powell said. “Fed hikes and volatility have been central themes of 2022, and investors should expect both – along with hits to corporate earnings – as we enter the new year.”
Traders change trading strategies to match market
To counter market reactions to economic news events such as the (CPI) and Fed actions, Simpler’s traders apply varying, individualized strategies to work through this volatility.
Raghee Horner, Managing Director of Futures Trading at Simpler Trading, follows stock chart zone indicators that show hourly price movements. These provide a guide to identify price support for higher moves.
“A lot of times it’s not a matter of a level being touched and then the markets just take off from there,” Raghee said. “A lot of times it’s the patience to wait for these zones to be reached.”
Current volatile market conditions can test the patience of traders.
Raghee leans into price movement of the indices and bonds when the market starts to shift. If indices and bonds don’t look promising, she turns to other markets such as foreign currency or gold.
“Those are going to be excellent pivots, not in strategy and not ignoring structure, but rather in fine-tuning your watchlist as the trading day progresses, Raghee said. “Don’t feel the need to force trades in the indices.”
Another market arena to watch is trading premarket action ahead of economic data releases.
Chandler Horton, Director of Day Trading Strategies at Simpler Trading, applies his zero days to expiration (0DTE) strategy for premarket trades on the S&P 500 (SPX). He plans ahead for news events such as the CPI data release earlier this week, targeting times when there is an expectation of above average implied volatility (IV) in stock options.
“We need to have an event that will cause a large move,” Chandler said. “We have no clue which way it will go, and we don’t need to. But we need to have variables for at least a better chance to have a large move occur.”
Chandler pointed out an example of IV at 100+ in SPX options ahead of the CPI release, where 40 IV is average. He pointed out that the key with this strategy is not “guessing” at which way the market will move, up or down, and chasing that guess. He will take trades that balance against any direction the market moves.
“We’re here to take advantage of probability and low-risk, high-reward setups,” Chandler said.
Chandler will take these options trades pre market ahead of the news event, and still get out of the trades pre market after the news event takes place. All this happens before the opening bell.
With these fast-moving trades, Chandler pointed out that risk management is key and traders have to stay on top of the trade and exit accordingly.
“We walk away with the profits before the bell even rings,” Chandler said. “You get to trade the rest of the day.”
For more stock options trading strategies, follow the Simpler team for live trading.