Stocks closed higher this afternoon following a wild trading session that saw sentiment flip several times. The Dow, S&P, and Nasdaq Composite all gained on the day as traders continued yesterday’s dip buying.
But the market got off to a rough start this morning in response to remarks from Fed Chairman Jerome Powell.
“History cautions strongly against prematurely loosening policy,” he said in a speech at the Cato Institute.
“I can assure you that my colleagues and I are strongly committed to this project and we will keep at it until the job is done.”
The European Central Bank (ECB) hiked rates by 75 basis points this morning, too, but the rate increase had little impact on stocks. Investors were already expecting a hike of that magnitude. Similarly, the market anticipates a 75 basis point rate increase from the Fed tomorrow morning. That’s why what Powell says about fighting inflation – not the rate hike itself – will be more important.
Hawkish comments during Powell’s post-FOMC press conference would certainly sour the mood on Wall Street. Remember when Powell’s speeches typically sparked buying frenzies?
These days, though, stocks fall whenever Powell talks. That could change if Powell surprises with a dovish tilt to his press conference, especially after he dialed up the hawkishness this morning in his Cato Institute speech.
Really, the market just wants to know how many more 75 basis point hikes are on the way. Stocks temporarily headed lower through noon today after Bloomberg reported that officers from the ECB said the bank would raise rates by 75 basis points in October if inflation doesn’t show signs of subsiding substantially (hint: it won’t).
The Fed is likely in the same boat. We’ll probably find out tomorrow from Powell himself.
Regardless, today’s blast higher helped the S&P (as represented by the SPY) close above the 10-day moving average for the first time since mid-August. It also closed above its bearish trend (blue trendline) and support (yellow line).
Next up is the 50-day moving average. The stochastic indicator suggests that the index could easily cross the 50-SMA in the coming days. It all depends, of course, on how the market receives tomorrow’s rate hike and post-FOMC press conference.
A hawkish Powell could spike stocks back down to their June lows. On the other hand, the uber-bearishness of the market these days could also lead to a major short squeeze higher.
That’s why it might make sense to take the SPY long with a trade trigger of $404.87, above today’s high, as the general market awaits Powell’s presser.
