Investors attempt to call FED's bluff

2 feb 2023

The Federal Reserve raised interest rates by 25 basis points yesterday. Jerome Powell reiterated his commitment to hiking rates throughout the year, and, more importantly, he dismissed any prospects of rate cuts in 2023. Despite that, investors seem to ignore the FED’s rhetoric and try to fight it. In our opinion, the disconnect between reality and the market is growing to tremendous proportions that we have not seen in years. That is particularly worrisome as we continue to see a lot of corporate underperformance and outlook downgrades during the current earnings season. As we noted in our previous article, the conditions are moving closer to a big repricing event. Investors are irrationally complacent at the moment, trying to call FED’s bluff. However, we expect the mood to change once it becomes clear that the U.S. central bank is not bluffing (or once we start seeing a deterioration in the labor market). Therefore, we treat the current rally with the utmost caution.

Illustration 1.01

Illustration 1.02 displays the daily chart of SPX. It also shows two SMAs and simple support/resistance levels. For the rally’s continuation, we would like to see SPX hold above Support 1 and SMAs. If the price breaks below Support 1, it will bolster the bearish odds; the same applies if it falls below SMAs.

Technical analysis
Daily time frame = Bullish
Weekly time frame = Slightly bullish

Illustration 1.02

Illustration 1.02 displays the weekly chart of SPX. The yellow arrow indicates a price retracement toward the 50-week SMA (and breakout above it). We will pay close attention if the price manages to hold above this level; if yes, it will further bolster the bullish odds.

Please feel free to express your ideas and thoughts in the comment section.

DISCLAIMER: This analysis is not intended to encourage any buying or selling of any particular securities. Furthermore, it should not be a basis for taking any trade action by an individual investor. Therefore, your own due diligence is highly advised before entering a trade.