Today’s Fed report could make the markets go haywire

Traders will be listening out for the latest Fed announcement later, says John C Burford. But all you need to know is in the charts.

Every month around this date, the US Federal Reserve reports the minutes of its latest meeting and the markets are all ears for tonight's report.

Of course, what traders are waiting for is a sign and sometimes, it is no more than a wisp of a smoke signal of their intention regarding interest rates. Amazingly, many analysts spend their lives parsing the often arcane Fed utterances.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

Traders are especially keen to have this information now. The Fed Funds rate has been pinned to the floor for the past 78 months (yes, that is no misprint). Traders know that the Fed is desperate to start raising rates.

That is because the US economy is showing signs of life and a bout of inflation is rearing its head again. If rates are held at zero for too long, an episode of high inflation is feared and the Fed have their target at a 2% rate. They are afraid of being behind the curve a charge that has stuck the last time they raised rates in a tardy fashion.

Advertisement
Advertisement - Article continues below

But with everyone leveraged up to the eyeballs (NYSE margin debt at record high), rising rates would spell curtains for most asset price growth.

I know that no agency on earth can control the consumer inflation (or deflation) rate, but the majority of market participants don't know that! Money managers have a lot to be thankful to the Fed for after all, it saved their skins in 2008/2009 with ZIRP (Zero Interest-Rate Policy) and enabled them to make massive profits.

Faith in the Fed runs very high and that is why we need to pay attention to the market's response to the Fed's words.

One measure of the utter faith that the Fed will always support stock prices is the current extreme level of bullishness towards stocks.

Below is a chart of the S&P 500 together with the Investors Intelligence Advisors survey:

15-6-17-MWT-1

Chart courtesy ofwww.elliottwave.com.

Advertisement
Advertisement - Article continues below

It shows that extreme bullishness has been present for almost two years (with a few dips along the way). That level of complacency can only be sustained that long by managers having complete trust (some with fingers crossed) in the Fed.

Will the Dax rally whatever the Fed says?

I suggested that the Dax

Fibonacci retrace level

15-6-17-MWT-2

It hit the Fibonacci 38% retrace of the entire rally off the October low a significant area of support. Not only that, but I can draw in a very pretty tramline pair where the market also hit the lower tramline yesterday. My bounce was delayed, but I did get it.

That was a superb place to take profits at the 10,860 level for a tasty gain of around 600 pips. And that is why the Dax is such a great vehicle to trade using my tramline methods.

That 10,860 level was a superb place to take profits for a tasty gain of around 600 pips.If there is no good setup in one, there may be in the other.

Advertisement
Advertisement - Article continues below

The decline off the April high has the appearance of an A-B-C, and that throws up the intriguing possibility that yesterday marked a significant low just prior to a rally phase. That is because a three-wave pattern is always counter-trend, and with the momentum divergence at the low a rally becomes a quite distinct probability.

Does this mean that the markets will rally today, regardless of what the Fed throws at us?

How to play a major report

That throws up a dilemma for traders. Do you enter the report with open positions, or exit all or most of them beforehand, locking in your profits?

That is a tough question and there is no hard -and-fast rule (ias so often in trading).

With extreme volatility comes the high risk that your protective stops will be hit. An early exit would help you keep more profit, which is always desirable.

But there are instances where a report can cause the market just takes off in your direction. That bumps up your happiness factor enormously.

Advertisement
Advertisement - Article continues below

Most of the time, I prefer to at least lighten up my positions a day or two before the report date, especially if I have a good profit. That way, I can view the market's reaction with some equanimity, which would be rather difficult if I held big positions!

I reckon that I can always look for another entry afterwards. I do not regret having missed out on some profit.

Being in a state of composure is very valuable when all around you are engaged in highly emotional trading.

As I've written before, emotional trading is rarely good trading. As my first goal in trading is not to lose money, I don't enjoy emotional trading.

That said, if you are an adrenaline junkie, you will of course relish the idea of taking positions into the maelstrom!

Horses for courses.

Advertisement

Recommended

Visit/519524/how-my-2019-spreadbetting-tips-fared
Share tips

How my 2019 spreadbetting tips fared

Matthew Partridge reviews performance of his 2019 spreadbetting tips. This year’s winners include Bellway, JD Sports and Taylor Wimpey.
17 Dec 2019
Visit/519285/bettingon-politics-some-safe-labour-bets
Spread betting

Betting on politics: some safe Labour bets

Matthew Partridge outlines a few flutters on what should be safe Labour seats in the general election.
10 Dec 2019
Visit/518916/ds-smith-will-deliver
Spread betting

DS Smith will deliver: here's how to play the share price

Packaging group DS Smith is profiting from the online retail boom. Matthew Partridge explains how traders can play the share price.
3 Dec 2019
Visit/518908/betting-on-politics-28
Spread betting

Betting on politics: don't put your money on the SNP

Scottish voters are strongly opposed to another independence referendum, says Matthew Partridge. That opens up a few tasty punts against he SNP.
29 Nov 2019

Most Popular

Visit/520525/currency-corner-how-high-can-the-pound-go-against-the-euro-in-2020
Currencies

Currency Corner: how high can the pound go against the euro in 2020?

In the month in which we should finally leave the European Union, Dominic Frisby takes a look at the pound vs the euro and asks just how high sterling…
13 Jan 2020
Visit/520575/20-predictions-for-the-2020s
Investments

Where will markets be in 2030? Here are 20 forecasts for the 2020s

A lot has changed in the last ten years – stockmarkets soared, technology transformed our lives and politics has changed beyond measure. Here, Dominic…
14 Jan 2020
Visit/520338/how-much-the-state-pension-will-rise-by-this-year
Personal finance

How much the state pension will rise by this year

While Boris Johnson promised to hold a full budget within 100 days of his election victory, many of the details of next year’s state pension increases…
10 Jan 2020
Visit/520553/money-minute-wednesday-15-january
Economy

Money Minute Wednesday 15 January: UK inflation and house prices

In today’s Money Minute, we look ahead to the latest UK inflation and house price figures, plus we have Germany’s GDP data for 2019.
15 Jan 2020