The Federal Reserve promises to wipe out the economy to save it, states Jon Markman, editor of Strategic Advantage.
Market participants spent most of Tuesday waiting for the outcome of the Federal Reserve’s rate-setting committee meeting. It’s kind of like waiting for Godot but with worse acting.
The S&P 500 (SPX) did surge immediately after—no surprise—the Fed raised its key lending rate by 75 basis points. However, sellers overwhelmed buyers into the close and crushed their bullish vanity. The benchmark index finished at 3,760, a big loss of 2.5%.
Fed Chairman Powell said Wednesday that interest rates must move even higher than previously thought, given a string of stronger-than-expected economic reports. It was the worst of all possible outcomes for bulls, and they are now likely to concede a decline to at least 3,680 for the benchmark S&P 500, about 2.1% below current levels.
Stock groups that are sensitive to consumer loans and spending—ie home builders, lenders, and retailers—are especially vulnerable. The bulls need to hold the 3,680 level through the remainder of this week to regroup. Overhead resistance is 3,820, the declining 50-day moving average.
Look for bears to aggressively sell any early advance to that level. No messing around. Although some bulls may try to be heroes by pushing up the weakened tape on Thursday or Friday, we suspect there’s a better-than-even chance that the next leg of the bear market is set to begin.
The Trade: The market is not trending at this time. Stay on the sidelines for now but get ready for the next major move. Keep current position WisdomTree Bloomberg Floating Rate Treasury ETF (USFR), a cash alternative.
