How will the markets respond? Four ways to trade Fed decision
Who has been buying in the last couple of weeks? Maybe those that are hopeful the Fed will keep rates artificially low
are buying ahead of that awaited announcement? Or are people are buying
for no other reason than others are buying? It is really hard to predict the market movements after the Fed announcement. But analyst Jani Ziedins projects four possible outcomes and four possible ways to trade them:
1) Rally after hike
This is a bullish signal as it tells us the market no longer cares about China or rate hikes. Everyone who is worried these things sold weeks ago and when there is no one left to sell a headline, it stops mattering.
2) Selloff after hike
Over the medium-term this is a bullish outcome because the rate-hike discussions and lack of confidence are finally over. While the knee-jerk reaction was to sell the news, a 0.25% jump in short-term interest rates will not have a material impact on the U.S. economy. There will be plenty of value oriented buyers ready to jump in and snap up discount shares from fearful sellers. While it is possible to slide to the lower end of the trading range, even undercutting the 1,860 lows, the Fed hiking rates tells us they believe in this economy and so should we.
3) Rally after no hike
This will mark a temporary relief rally that will fade. Postponing
the rate hike by six or twelve weeks will not make much of a
difference and isn’t something to be happy about.
Jani says he would be worried over the Fed not hiking rates because it would mean they think they economy and stock market are too vulnerable to handle such a nominal
rate increase. If they’re worried, then investors should also be.
4) Selloff after no hike
A collapse following good news will signal to stay clear of
this market, says Ziedins. If the central bank doesn’t believe in this market, we could smash
through the lows.
The situation is further complex because the cloud of rate hike uncertainty continues indefinitely. The market can handle bad news because it is quantifiable. This uncertainty and indecision is what really drives it crazy.
