Hey There Income Hunter,

There has been a powerful turnaround this week after Monday when the S&P 500 (Ticker: SPX) closed down 2% and on the low of the day.

The question now is will the market break the pattern of trending lower into Federal Open Market Committee (FOMC) meetings?

Technically the market looks to be in much better shape than it has been in a while and I could easily see a move to 400 in SPDR S&P 500 ETF (Ticker: SPY) … 

However, when you dive a bit deeper that may be as far as we go before resuming the bear trend …

Today, we’ll take a look at why and what may be a good way to play it …

Powell May not be Calling the Shots

The Fed is now acting on behalf of the Treasury and Government so we have to think of what is best for the current administration.

Think about it this way: the only thing that matters to the Democratic party at this point is winning in 2024.

And the way to do that would be to get inflation down as far as possible. This way the Dems can say “we did our job to help Americans with their high costs.”

Next they can blame the inevitable recession on inflation, and then come to the rescue of the economy.

You have to always remember decisions at the White House are purely based on winning the next election. 

So under that assumption, the Fed will most likely remain hawkish until something breaks … 

This administration needs the Fed to be responsible for a break in the financial system so they can come in as the heroes, and pass a large spending bill. 

The Pattern into Fed Meetings May Continue

Since the Fed began its tightening cycle, stocks have trended lower into each meeting. 

That is three meetings with the same pattern! 

Now, no doubt sentiment is extremely bearish and at some point the market will look beyond the Fed tightening to “when does it pivot?” but I am not sure that is now.

If the Fed pulls back their hawkishness now you could see a flood of money come into the markets under the assumption they are done.

Well, with inflation’s last print at 9.1% that could send inflation even higher. So, I do not think the Fed can afford to change their tune just yet. 

Below is the pattern of S&P 500 trends into each of the last three FOMC meetings:

Notice how quickly the market traded off into each one. Should this one be different, in just the beginning of what has so far been disappointing results?

Consider a Bullish Play on the Dollar 

A conservative play heading into the FOMC may be a bullish strategy on the Invesco US Dollar Index ETF (Ticker: UUP).

Europe has an absolute mess on its hands. If you sell Invesco Euro Currency Trust (Ticker: FXE), you are long the dollar and short Europe after a correction higher for the Euro.

The Euro may rally once the European Central Bank (ECB) announces their policy decision providing an even better entry point on the trade.

The energy crisis will weigh very heavily on Europe and the ECB will pivot back to an easing policy before the Fed, which will weaken the Euro as more Euro will need to be created. 

Bring It Home

Yesterday, my commentary was that the dollar sell-off may be over, as the good news on the Nord Stream 1 pipeline that will send Russian natural gas to Europe is now priced in the market.

No matter what, it will not change the damage a loss of energy will do to the European economy in the months ahead. 

When you have the macro forces behind you and the timing of the trade puts you in a beneficial position, the probability of success makes it an easy decision.

This may be one of those situations. Good luck and as always …

Live and Trade With Passion My Friend,

Griff