Hey There Income Hunter,
Stocks whipsawed back and forth yesterday on an unemployment report that showed continued strength in jobs – but a deceleration in wages.
Then, at 10 a.m. the ISM services index came in much weaker than expected. This was a shocker as the services index now joins the manufacturing index in contractionary territory (below 50).
The ISM fell from 56.5 to 49.6, which is a complete disaster.
Immediately, the pricing for a .50% rate hike at the next Fed meeting fell to just a 25% chance.
The perverse reaction was that stocks soared on the news. Well, perverse in reality but not in an environment where investors have joined the banks in hoping for bailouts from the government when things go bad.
Today, I’ll show you what a Fed pivot actually means for the markets.
Historical Reality of a Fed Pivot
Let’s think about the logic of a Fed pivot.
A shift from tight monetary policy to loose monetary policy usually occurs when the financial system is in trouble.
Secondly, the loosening of monetary policy is mostly just a sugar rush that lifts all boats momentarily before the next tide goes out.
The Fed created the current narrative on the Fed pivot after 40 years of manipulating one boom/bust cycle after another. Each cycle ended with a weaker economy and more debt. Now it is time to pay the piper, but the younger generation of traders cannot see the forest for the trees. (Can’t say I don’t like a good metaphor!)
Let’s take a look at what happened to the stock market each time the Fed has pivoted from tightening to easing over the past 30 years …
The chart below illustrates the Fed interest rate in orange and the S&P 500 index in blue. The gray shaded areas represent recession. Even prior to Covid the Fed had already started cutting rates because the economy was already heading towards another recession.
Bring It Home
The point is, a Fed pivot is actually really bad news for the economy and the issue for traders is the Fed will surprise the market when they actually pull the trigger.
In the past they have executed a policy shift over the weekend and then it is a hard trade to chase when the initial move has begun.
I pounded the table on this issue at the Win the Week live event on Thursday.
Win the Week is a tactical trading process that is easy, fast and consistently profitable.
Hope is not a strategy, but trading the market week by week using a disciplined approach that works in every market environment is.
My Win the Week service is on a run that includes …
- 9 wins in my last 11 trades
- Including gains of 76%, 96% and 98%
- Each in less than four days
Live and Trade With Passion My Friend,
Griff