The Fed Doubles Down on Tightening … Look Out Below

Hey There Income Hunters,

 

I don’t think anyone could have predicted the Fed would lean THIS hawkish.

 

The FOMC’s opinions on the start and pace of rate hikes was actually startling.

 

      • Based on their opinions regarding the labor market and inflation, Fed members’ believe a federal funds rate increase sooner than they anticipated may be needed.

 

      • Comments also indicate they believe it could be appropriate to begin reducing the Fed’s balance sheet relatively soon after beginning to raise rates. This would entail draining bank reserves through reverse QE once the tapering is completed. 

 

The market has now priced in a 73% chance the Fed starts raising rates in March. 

 

Today, we’ll take a look at what that means for the market and the sectors that will outperform in this environment …

 

Not a Pretty Picture … 

 

Notice the sectors that held the best … consumer staples and utilities.

 

These are the most defensive sectors of the S&P.  

 

There could be much more of a fall to come. The Fed is officially on a hawkish tightening path 

with no end in sight right now.

 

How the Market Will React

 

Take a look at the last three times the Fed ended and even reversed QE …

 

The S&P 500 dropped pretty quickly after QE ended and ultimately traded down between 15% to 20% before the Fed flipped back to providing stimulus …

 

 

Why should this time be any different?

 

I knew this was coming.

 

If you have been reading Power Income, then you knew it was coming. 

 

If you’re a Power Income Trader member, you’re profiting.

 

I had the Power Income Traders in long put spreads on the SPDR Select Sector Technology ETF (Ticker: XLK).

 

In one week the trade was good for a +74% gain.

 

Sell Tech on Rallies

 

We could see XLK head down another $20 from here and that would equate to a 16% drop.

 

Check out the damage that has been done this week.

 

Tech is still the most vulnerable sector in the market because higher interest rates are bad for tech and now the Fed raised the bar on how high interest rates will go. 

 

Watch the US 10-year Yield

 

I don’t think the Fed will interfere with higher rates until the 10-year gets above 2% and maybe even 2.5% …

 

That kind of move higher in rates will put a lot of pressure on tech, especially since mega-cap growth stocks are long duration assets that are inversely correlated to interest rates.

 

The US 10-year yield chart below shows early signs of a potential breakout to higher rates …

 

 

Bring It Home

 

Stay tuned to Power Income for more details on where the money will flow next.

 

I think one of the surprises on Wednesday was how well gold and gold miners held in. 

 

The precious metals have already been beaten down and as the Fed moves closer to having to flip back to stimulating the economy and market – so precious metals and miners will outperform the most. 

 

I also think we should see oil rollover and head lower in the weeks ahead, which will be a great opportunity to get into energy stocks.

 

Until then …

 

Live and Trade With Passion My Friends,

Griff

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