A very hawkish skip

Mid-week market update: It’s not easy to make a market comment on an FOMC day. Let’s start by analyzing the Fed’s projections. The latest Summary of Economic Projections (SEP) shows a stronger economy and tigher monetary policy in response to the revised projections.


The Fed revised up its GDP projections for this year by 0.6% and revised down the unemployment rate by 0.4%. While headline PCE inflation is expected to fade by -0.1%, the more important core PCE was revised up by 0.3%. As a consequence, the target Fed Funds rate projection rose by 0.5% for 2023, with further upside revisions for 2024 and 2025.



During the press conference, Powell reiterated several times that the July meeting is “live”, meaning that they could raise rates at that meeting, and the risks to inflation is tilted to the upside. Equally important, Powell said that there were no plans to adjust the RRP rate in response to the Treasury’s expected $1 trillion issuance (see How the Treasury refresh may not be catastrophic), which is a sign that the Fed may not be able to act in a timely manner should Treasury issuance drain liquidity from the banking system and threaten the price of risk assets.

As a result, the market is now expecting a quarter-point rate hike at the July meeting and no cuts this year. Note that those expectations fall short of the Fed guidance of a cumulative 50 basis points for 2023.




An extended advance

Turning to the stock market, the S&P 500  initially sold off in response to the Fed decision, but recovered to roughly flat by the end of the day. Zooming out to the weekly chart for a longer-term perspective, the index blew past a key Fibonacci retracement level that served as resistance. However, the 5-week RSI has reached levels that have signaled market stalls and pullbacks in the past.


I have been looking for signs that the advance is broadening out beyond a handful of market leaders, but that doesn’t seem to be the case. An apples-to-apples comparison of the equal-weighted index to the float-weighted index for the S&P 500 and NASDAQ 100 shows that the equal-weighted indices continue to undeperform. This is a sign that the largest weights in each of the respective indices are doing the heavy liftin in the rally. In other words, breadth is still narrow.



This week is June option expiry (OpEx), and Jeff Hirsch observed that June Opex returns tend to be volatile.While the win rate is positive (24 up and 17 down), returns have been uneven. Average returns are negative while median returns are negative. However, the following week has shown a negative bias.



My inner trader is maintaining his short position in the S&P 500. I received some inquiries from readers about how I set my stop loss positions and I want to address that question. I disclose the entry and exit points of my trading to disclose possible conflict. Between those entry and exit signals can be gradients of positions. I could either add or subtract from my short (in this case) in accordance with my risk and profit assessments. I don’t disclose those changes because they depend on my personal risk profile. My return expectations are not the same as yours. My pain threshold are not the same as yours. My tax situation is definitely the same as yours. That’s why the disclosure of those adjustments are entirely inappropriate. Any reader who decides to act on my entry and exit disclosures should set their own risk parameters and set their own stop loss levels. I can’t do that for you. If I did, I would be offering a fund that sets out risk levels.

That’s a long-winded way of reiterating the importance of reading and understanding the disclaimers about my trading positions.

I would like to add a note about the disclosure of my trading account after discussions with some readers. I disclose the direction of my trading exposure to indicate any potential conflicts. I use leveraged ETFs because the account is a tax-deferred account that does not allow margin trading and my degree of exposure is a relatively small percentage of the account. It emphatically does not represent an endorsement that you should follow my use of these products to trade their own account.  Leverage ETFs have a known decay problem that don’t make the suitable for anything other than short-term trading. You have to determine and be responsible for your own risk tolerance and pain thresholds. Your own mileage will and should vary.



Disclosure: Long SPXU

1 thought on “A very hawkish skip

  1. I think the question is ” will we have a recession?”
    So many things say we will, aside from it being overdue.
    Recessions are bull market killers, or so they say.
    Will the FOMOers exhaust themselves now?
    Today’s candle is a hanging man…we’ll see what happens.
    Hanging on to my short but it has been hard.

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