Traders spend a lot of time preparing for major market events.
Whether it’s an earnings announcement, an employment or inflation report, or a Federal Reserve meeting, the assumption is that the uncertainty will disappear and the market will become easier to trade once that event passes.
But markets don’t always work that way.
Sometimes the event answers one question… only to replace it with another. So instead of bringing clarity, it simply changes what traders have to worry about next.
We saw a good example of that with Wednesday’s Fed meeting.
Going into the meeting, markets were pricing a near-certainty that the Fed would hike rates by 0.25%. When that move was confirmed, it came as little surprise.
Yet uncertainty hasn’t disappeared. Now the market is assessing an entirely new set of risks…
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Before the Fed’s meeting, the immediate question was whether the Fed would raise rates. But now that we know the answer, attention has shifted to what happens next.
Was this simply a one-off move or the beginning of a tightening cycle?
Fed Chair Kevin Warsh didn’t offer a definitive answer. However, he made it clear that inflation remains too high and that data over the summer hasn’t shown a meaningful improvement in the underlying trend.
Warsh described the rate hike as removing “a dose of accommodation.” In other words, the Fed made borrowing money a little more expensive. And with the economy remaining relatively strong, the Fed clearly believes it has room to hike again if inflation remains uncontrolled.
That’s generated new questions. Will rising oil prices keep inflation elevated enough to justify another hike? Will the Fed increase rates again before the end of the year?
More broadly, how much pressure can the economy, housing market, and stocks absorb if Treasury yields continue to track higher?
In short, the market is no longer trading the Fed’s decision. It is beginning to price the potential rate path ahead.
Some traders stay out of the markets before a major announcement. They want to avoid the risk surrounding it. And that can be a perfectly rational decision.
But if they jump straight back in once the announcement has passed, that can be a mistake.
The first move after a major event is often driven by algorithms, short-covering, and traders unwinding positions they put on going into the announcement.
That initial reaction can quickly reverse once the market has sufficient time to process what the announcement actually means.
That’s why I typically ignore the immediate market reaction and wait for a new setup to develop.
I watch whether the price can hold or break through a key technical level – and how that move corresponds with other key markets and technical signals.
Regarding the Fed’s decision on Wednesday, that means looking beyond the action of the S&P 500 alone. If the dollar and Treasury yields continue to climb – and rate-sensitive parts of the market continue to weaken – that’s telling me the market is pricing in a more aggressive rate path from the Fed.
However, if yields stabilize or reverse, the dollar pulls back, and stocks regain lost ground, investors may believe the Fed’s increase will be a one-off move.
We have to recognize that the market may need time to establish a new direction after the news event passes.
Don’t assume the first reaction provides the final answer. Let the market digest the news, watch how the important levels behave, and patiently wait for the next genuine setup to unfold.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict
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