Hey There Income Hunters,
J-Pow really shocked the markets last week when he took an already aggressive tightening stance and turned the screws even further.
Consider these headlines:
- The Fed may begin absolute reduction of the balance sheet once QE stimulus is removed
- Once QE is removed the Fed could begin raising rates (March)
- The market has now priced in an 80% chance for 4 rate hikes in 2022
This really sets the markets up for a volatile week. (Good thing we’re all set for TradeFest on Thursday.)
Besides listening to every word out of Fed speakers this week, the market will also get an all-important consumer price index (CPI) report on Wednesday.
If that wasn’t enough, the Treasury will issue $130 billion in US Treasury bonds in the next eight days.
Today, I’ll share the charts and levels that will be most important to keep an eye on this week.
If the Fed continues to talk ultra-hawkish this week, SPX will head below 4,400.
However, if J-Pow and his team provide some dovish headlines they could trigger a move to new highs.
I am slightly positioned for some dovish words and a rally, but I think either path is possible this week.
We know how badly stocks and bonds need constant liquidity from the Fed and US government in order to maintain these frothy valuations.
So, in the end, I think SPX will suffer a 10%+ correction, which the Fed needs in order to be able get back to what they do best, which is print money.
SPX was able to close above the 50 DMA on Friday, but you can see the higher-than-normal volume that has caused the move down last week.
It may be worth buying a new low on light volume on Monday to see if buying enters and we get the Fed to throw the market a bone.
US 10-Year Treasury Bond (US10Y)
I am bullish on bonds.
I do not think there is any way the Fed will tighten four times this year.
The market is way too fragile and as the tightening begins, growth and inflation will slow quickly, forcing the Fed to reverse course.
When the market gets a whiff of the Fed considering a less hawkish stance, bond prices will soar.
Notice how important the 2% yield is on the chart below. We may grind towards the 2% level, especially in the next week with all the bond supply, but I think the risk/reward favors being long the bond ETFs, including:
- iShares 20+ Maturity Treasury Bond ETF (Ticker: TLT)
- iShares 7-10yr Maturity Treasury Bond ETF (Ticker: IEF)
- iShares 3-7yr Maturity Treasury Bond ETF (Ticker: IEI)
If the Fed does provide dovish headlines this week, the iShares Investment Grade Corporate Bond ETF (Ticker: LQD) is a great choice for a quick recovery from oversold territory (see below):
CFDs on Physical Gold (Gold)
Gold has traded very well relative to bond rates rising aggressively. I think this is a most important sign for investors.
If the Fed does make the mistake of over tightening and stocks get crushed, gold may take out $1, 770 and head down towards the $1,675 bottom.
Notice the moving average congestion between $1,830 and $1,770. I will play a break out of this range for a good short-term low risk/high reward trade.
However, I am hoping for one last drop in Gold based on a collapse in stocks that will be met with Fed stimulus on steroids.
The stimulus would be even greater than the initial $3 trillion after Covid.
Gold, silver, and the miners will soar, and the dollar will resume its longer-term downtrend.
I believe this final flip by the Fed is inevitable and it’s just a matter of how long the Fed can keep up this balancing act of he said/she said and their hawkish/dovish nonsense.
Bring It Home
This market environment is very far from the free markets of the past. Today’s market is like a centrally rigged casino and the Fed is the pit boss.
The great thing about today’s market is that the Fed is predictable.
As investors realize the Fed has one tool in its toolbox and that is the money printer, then you can forecast where the market is headed by anticipating what they’re going to do.
I know what they are trying to do and what they will do in the near-term future. Want a peek at my blueprint for trading?
Join me and all Option Pit traders led by Mark Sebastian on Thursday Jan. 13. for the inaugural OptionFest.
Live and Trade With Passion My Friends,