Hey There Income Hunter,
We have a huge week ahead.
I’ve said many times in the past few weeks that once the Fed pulls another 180 and flips back to QE – just as it did in December 2018 – watch gold, silver, and the miners shoot higher.
I initially felt the Fed would reverse course in Q4 of this year, which is usually the worst time for equities.
However, after last week’s price action in equities and especially the big losses in tech I think the Fed may pull back even sooner …
The Fed’s gauge on how it is doing is the stock market (and always has been).
Earnings and guidance among some of the Big Tech names, such as Amazon (Ticker: AMZN) and Apple (Ticker: AAPL), have been disappointing to say the least.
Both the Nasdaq and the S&P 500 closed at new lows for the year on Friday …
In fact, the Nasdaq is down a whopping 24% and is deep in bear market territory. The S&P, meanwhile, is off to its worst start to a year since 1939.
In recent weeks, Fed Chairman Jerome Powell said the economy could withstand rising interest rates and a reduction in the balance sheet.
Fast forward to last Thursday and preliminary GDP numbers for Q1.
Woof!
GDP for Q1 ’22 was reported at a recessionary -1.4%.
For context, the consensus estimate for the quarter had been 1.1% … and GDP in Q4 was 6.9%
Furthermore, mortgage rates have skyrocketed as the Fed stopped buying mortgage-backed securities. And new home sales plummeted 8.6% in March compared to a forecast decline of 1.2%.
Today, we’ll look at the internals of the market for clues on what to expect post-FOMC on Wednesday.
Slippin’
With stocks plummeting and the real economy slipping into recession, pressure is increasing on the Fed …
The central bank must either pull back from the nine additional rate hikes priced into the market or, at a minimum, delay any reduction in the balance sheet.
Given that the justification for tightening policy was soaring inflation, all that remains for the Fed to scale back some of their plans is a lower inflation figure …
Now, we will get the April CPI data on May 11 and PPI data on May 12, both a week after the FOMC meeting, and they should both show a deceleration from April 2021.
If we do get lower headline numbers and the Fed hints at pulling back on its tightening goals, then we could get …
- An extended stock rally
- A likely peak in the dollar
- And the bottom in gold and silver, if they haven’t already started to rally ahead of the inflation reports.
Key internals for S&P 500 Index ETF (SPY)
Markets ended sharply lower last week. They were punished by end-of-month repositioning, concern over the Fed’s more hawkish pivot over the past couple of weeks, Russia’s continued expansion and a resurgence in COVID-19 abroad.
The level that has been solid support below the market in SPY, 420, did not hold on Friday’s liquidation, so we begin this week at a new low close over the past year.
Notice in the chart below that there is a potential bullish relative strength index (RSI) reversal building in SPY:
The technical picture favors a sell-the-rumor-buy-the-fact set up for the FOMC meeting on Wednesday.
This is very similar to the March 16 FOMC meeting when selling dominated trade for weeks prior.
Then, as now, put buying was constant heading into the meeting. As vol came off post-meeting, it triggered a massive short covering rally …
The chart below illustrates the daily S&P 500 index candlesticks for 2022. Notice the downtrend into the March FOMC and the rally post meeting …
Next week’s meeting offers similar potential for a rally due to the economic numbers of the past week.
If Powell mentions the economic weakness or raises rates 50 basis points but delays QT, the markets could once again explode higher for a week or two
This offers an opportunity to buy call spreads on SPY or buy put spreads on the VIX.
Bring It Home
There is a great opportunity this week to take advantage of an equity market that is put heavy, meaning is oversold and can easily reverse if the FOMC result is simply as expected.
I continue to believe the inflation picture peaked in April … and the inflation numbers (CPI and PPI) coming out a week after the FOMC will prove my point. If they are, in fact, softer than April that could add fuel to a short covering rally.
When the market is out of balance, in this case a put/call ratio that favors puts, the probability of making money taking the opposite side is in your favor.
Stay tuned to Power Income for a couple of stocks to consider buying in the days ahead and as always …
Live and Trade With Passion My Friend,
Griff