EB Daily Market Report - Quick Update - Wednesday, May 3, 2023
Well, it's Fed day. When the policy statement is announced at 2:00pm ET today, it's widely believed that the FOMC will raise the fed funds rate by another quarter point. I'm much more interested, though, in what Fed Chief Powell has to say. He's said in the past that the Fed believes inflation has turned a corner, but that they want to remain vigilant, as today's 25 basis point hike would suggest. But will the Fed Chief acknowledge that today's hike is likely to be last one, of course dependent on future data? That stance could be very uplifting for the overall market, but especially for financials (XLF), which has been torched by the significant increase in the fed funds rate over the past year - and the resulting inverted yield curve. I wouldn't be surprised, in this scenario, if banks ($DJUSBK) rallied strongly. It would be a 7.5% move up to test key overhead price resistance:
While that could play bullishly short-term for banks and financials, I really believe confirmation that rate hikes are likely to end would send growth stocks surging vs. value stocks over the balance of 2023. I'm already seeing that expectation on the charts. Check out the following S&P 500 chart, with key growth vs. value ratios in the panels beneath:
The only concern I have here is the recent downtrend on the XLY:XLP, but I have a User-Defined Index (UDI) that tracks the XLY:XLP on an intraday basis. It's holding up much, much better than the ratio above, which includes gaps. That's where market maker manipulation comes in. I feel very confident in the intraday ratio that I've developed, which tells a different, and more bullish, story.
Growth has crushed value thus far in 2023. I am somewhat concerned about the "buy on rumor, sell on news" aspect of this. In other words, Wall Street has been prepping for the Fed putting on the brakes on rate hikes by moving into growth stocks this year. Once the Fed announces such a plan, will there be a "sell on rumor" and will we see value outperform for a period of time? That's a very difficult question to answer. Longer-term, however, I'm comfortable that growth outperforms.
Personally, I'm still holding some leverage with the TQQQ and SOXL, heading into the 2pm announcement. To do so, you MUST be willing to accept additional risk. Leverage ALWAYS presents additional risk, but in front of a Fed announcement, the risks really go up.
Either way, be prepared for volatility. There are normally multiple short-term moves and trends in the SPY and QQQ after a 2pm Fed announcement. Today is likely to be no different.
Let's see what the Fed has in store today.
Happy trading!
Tom