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S&P500 rallies following the Fed rate hike

It is always interesting to see the market reaction following a tier-1 data release. The FOMC is among the top market-moving events in any monthly economic calendar. In a couple of sessions time, we receive the NFP, which has also the potential to move the markets. If we discount the algo moves following the news events and look under the hood of the economy, there are reasons to be bullish. What we don’t want is for spending to be cut, taxes to rise, and for the Fed to push inflation higher as they raise the cost of credit, goods, and services with their monetary policy. For technical traders, waiting for the absorption of orders and a move back to the origination of the move is one way to swing trade the turns.

Weekly Index Analysis

The S&P500 looks very different in 2022 than it did in 2021. The trading ranges are larger, meaning we visit lower levels and then backfill at a greater magnitude than before. If you are a swing trader, you’re now holding for longer periods, if you are a trend follower, you may be getting stopped out often.

Some of the key differences are within the US Treasury department as they are clearly not spending as much into the economy as they had to during the pandemic era. That said the quantity of money flowing monthly into the US economy is still above anything seen prior to the pandemic emergency flows. Averaging above $600billion, this will increase over time as the Baby Boomers come into retirement more and start to tap the social security spending. There is also an increase in defense spending as the hostilities by Russia, the expansionary Chinese, and unknowns like Iran and North Korea mean increased defense spending is bipartisan.

It’s not only the US Treasury that is spending more, but we’re also seeing growth in bank credit, which was spurred on by the Fed raising rates, low unemployment figures, and high demand for goods and services. The fact that the US Treasury also reduced the reserves held also freed up the banks to lend more as they could under the Basel 3 ratios that they have to abide by.

Trends we should keep an eye on though, include the Feds decision last night to raise interest rates, as this means investors have an alternative now to equities when looking for yield. The Treasury General Account is also rising as taxes have been collected and debt is not being issued at levels, we had come accustomed to.

The Fed is currently happy with the level of unemployment, though they are now seeking to reduce demand, cut the rate of change in wage growth and see if they can stabilize prices. If this leads to a recession, we will see bank credit drop. If we don’t see a tax collection drop, that will mean people are still earning more, so a drop in tax collection could be an early warning of a negative market.

The market reaction to not getting a 75bps rate hike is not the move I want to follow. I feel it’s best to wait for the dust to settle and the volume to come back into the markets. With that said, if we look to the left and where the swings have originated, we are in a downtrend. We know that most companies within the index are below their 200-period moving average and that we can expect weakness in the index if we see flows into the higher yields of fixed income products and out of the riskier equities.

For those looking to follow the trend, initiating a short at 4438, with the potential of a further move higher into 4600, to add to that short, could be one way to trade the S&P500. Waiting for a reversal pattern on the lower time frames would be advisable rather than leaving a sell limit order in. The targets to the downside are below the 4000 level and potentially at 3900, all the way down to 3700. Below that and we get into deep retracement territory.

With the elevated fiscal flows supporting buyers, I would go for a swing trading strategy as the bear market rallies will be as intense as we have witnessed so far in 2022. We’re not going to just simply grind lower. Also, with the number of fiscal flows seemingly sticking at these levels, if we break and close above a significant swing high, the market melt-up that people have been calling for will accelerate and be similar in nature to that which we saw post-2011. This was a time when everyone was expecting the highs before the GFC to be the ceiling and couldn’t understand why the market kept grinding higher. We now know that was due to the perception of support via QE and that this monetary policy doesn’t create instant hyperinflation. Monetary policy and fiscal support are key to these markets' long-term moves.

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