When will the Fed be your friend again?
Fed thoughts & other market observations
If you have been paying attention to the market recently, I am sure you have heard the famous market statement by Marty Zweig in 1970, “don’t fight the Fed”, referring to the strong correlation between Federal Reserve policy and the stock market. So, let’s take a look to see if there is a shift in the path of interest rate expectations
Below is the current pricing of Fed Fund Futures or the overnight rate (super short term interest rate) and what the Fed controls. Notice the slope of the curve is highest in the next couple months, indicating faster rate hikes and then tapers off around Dec and then actually begins to slope lower as we head into ‘23. So, the market is starting to price in rate cuts in ‘23 even though they are are less dramatic as he rate increases this year. Keep in mind the Fed changes / adjusts as the market / information changes (see the second chart below).
In addition (to insert my opinion), the market is often ahead of the news, so we may see the market bottom sometime in the second half of this year provided that the inflation data improves (reminder, the next CPI report is 7/13 and PPI report 7/14 & next Fed meeting is 7/27)
What do I want to see in the second half of the year for a bottoming process:
More Participation.
Currently, the only sector above its 50d and 200d Moving Averages (MA) are the Utilities which would not exactly be considered “risk on”. Often, many single stocks bottom before the indices so the monitoring / scanning step is an important one for stock market analysis
More “Risk On” Sectors to participate
Right now Biotech, which is still in a downtrend, is showing some signs of life. The XBI (Equally Weighted Biotech ETF is above its 50d MA (see my post from 6/20 on Biotech Biotech a leading indicator? ) I would like to see more groups follow as Biotech may have bottomed for this year.
The S&P 500 futures to regain 3982, this month’s Value Area which uses Volume At Price, and its 50d MA which line up closely.
In conclusion, Patience is the key as the Equity Market is still in a downtrend and we are yet to get that “Fed pivot” away from their aggressive tightening stance. In my opinion, there are going to be some great opportunities in the second half of this year, but I want to let them come to me (wait for your pitch!) vs forcing trades when the market has not provided evidence of a market bottom. Keep in mind, often stocks take time building bases and start to form higher lows instead of “V” recoveries. I look forward to spotting these setups and changes as they begin to occur in the second half of the year provided that the Fed begins to soften their tightening stance. More to come!
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