The June 14th, 2017 Fed Hike, and Its’ Repercussions
Earlier in the week, I made a post regarding the Federal Reserve’s decision to hike not meaning anything to the market. I’m going to use $ES_F (the Standard & Poor’s 500 Index) here rather than $YM_F (the Dow Jones Industrial Average Futures) because the Dow is “price-weighted”…meaning that the most expensive stocks have the strongest impact on the average. This sort of index weighting can distort the true measure of the index rather easily. The S&P 500 is weighted based on the market capitalization of the companies within the index; which means companies with higher market capitalizations have more impact on the movement/pricing of the index. It’s also a basket of 500 stocks, rather than the Dow’s 30, so it also gives us a wider breadth of the market to base trends on.
So We’re In a Bear-Market Now For Sure Right?
Bears crying out all over the internet are saying this hike has essentially brought about the end of the world and the market. But take a look at the chart above…what happened to the market after all was said and done with Wednesday’s hike?
Absolutely nothing. The markets faded on low volume, rose on low volume, faded again on slightly higher volume and then on Friday returned to where it was (on decent volume) prior to the Fed hike announcement.
What do I make of an event like this?
The market makers and the smart money knew this would happen. If you follow me on StockTwits, you would have seen that I went on a selling spree of JUN expiries as well as some others on Wednesday before the announcement. Here’s a look at my stream…..
Had I waited for the decision, a lot of those 100%+ return trades would’ve not been as lucrative. This, I think was the work of big money and market makers letting all the bullish bets that were expiring yesterday (JUN17 options series) take a hit by holding onto those expiries or panic selling longer positions prematurely.
But as the chart shows, we are right back to where we were before the Fed’s announcement. As I also said in the aforementioned post, even rolling your JUN17 expiry options out a week would let you benefit from the market’s irrational response to the decision.
I think next week is going to be bullish and that we wrap up the month of June in bull mode. As we keep hitting new all-time highs on the indices, a pullback is to be expected regardless of the Fed. The biggest fear that was repeated through mainstream media after Yellen’s speech on Wednesday was when she discussed the unwinding of the Federal Reserve’s balance sheet likely to begin later on in the year.
While that unwinding will definitely have consequences on the market, it won’t until the process actually starts. Seasonality based on what we’ve seen so far this year would imply July giving us a correction or at least a taste of one (a correction is officially defined as a 10% drop). So I’ll be playing my options lightly and move most of my options portfolio to cash with the winners I have leading up to July. The markets might be choppy in July as they initiate the correction, which means (to me at least) that some sideline money as we await the market to make up its’ mind is a smart play. Having cash-on-hand will not only lock-in profits but allow me to allocate a larger amount of equity towards whatever the market decides to do come July.
Others are calling for further up in July before pullback, but to be honest I know for a fact that I’m not a magical predictor of market moves. There’s no way to know what happens next…sideline money allows you to not fight the market, but rather to join the trend once it is established.
So we’ll see what happens, but I do think we go bullish from here for at least a week or two.