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(Free) Are Rates Going Higher or Not?
Bulls AND bears needed this 3-day pullback.
Danny Riley
June 22, 2023
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Our View
Yesterday, Fed chairman Powell spoke at 10:00 am ET and continued to speak through the morning. As we are already in a pullback stage, it resulted in a choppy first half of the session.
Powell said he expects that interest rates will need to rise in an effort to lower US growth and contain price pressures.
When that happens, however, will depend on the data. “My colleagues and I understand the hardship that high inflation is causing, and we remain strongly committed to bringing inflation back down to our 2% goal,” Powell said in remarks prepared for the House Financial Services Committee. “We will continue to make our decisions meeting-by-meeting, based on the totality of incoming data and their implications for the outlook for economic activity and inflation, as well as the balance of risks.” The Federal Open Market Committee paused its series of interest-rate hikes last week for the first time in 15 months, leaving rates in a range of 5% to 5.25%. But Fed officials estimated rates would rise to 5.6% by the end of the year, according to their median projection, implying two additional quarter-point hikes to wrestle with slowing-but-sticky inflation and a strong US labor-market.
Are Powell & Co. simply jawboning?
Just this week, we wrote about how the market is pricing in one more hike in July (up to a range of 5.25% to 5.50%) and it’s decidedly mixed after that. By December, the market is currently pricing in an 85% chance that rates at that range or lower.
Our Lean — So Far, So Good on the Pullback
I said this would be a down week and so far so good. The ES is riding a three-day losing streak and bulls are trying to avoid making it a four-day streak today.
The last time we had a stretch of 3+ down days? May 1st through May 4th, when the ES fell in four straight sessions, coughing up 144 handles or 3.4%. Since then, it’s been in the bulls’ control…
This is Danny Riley’s personal trading plan for the day.
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MiM and Daily Recap
The ES traded down to 4418.50 on Globex and traded 4422 on Wednesday’s 9:30 futures open. After the open, the ES sold off down to 4404 at 10:09, rallied up to 4418.50 just below the VWAP, pulled back to the 4411 area and then dropped down to a new low at 4403.50 at 10:51. The ES rallied back up to 4415.75, sold off down to a higher low at 4404.25 and then rallied up to 4422.75 at 12:18 before slowly dropping back down to the 4408.50 level at 1:01. From there, it back-and-filled under the VWAP for the next 45 minutes, then blasted up to 4430.75 at 2:35.
It traded back down to 4407.25 at 3:39 as the early imbalance showed $1 billion to buy, then traded 4415 as the 3:50 cash imbalance showed $3.1 billion to buy and sold back off down to 4406.24 at 3:59 and traded 4411 on the 4:00 cash close. After 4:00, the ES settled at 4410 on the 5:00 futures close, down 25.50 points or 0.58% on the day.
In the end, the ES did exactly like I said it would in the Lean; sell the rallies. In terms of the ES’s overall tone, it was a choppy session. In terms of the ES’s overall trade, it was steady but low with 1.39 million futures traded.
Technical Edge
NYSE Breadth: 40% Upside Volume
Advance/Decline: 50% Advance
VIX: ~$14
Two things to note.
First, the S&P and Nasdaq sit at key junctures. Not life or death levels, but sitting at roughly the 50% retracement and 10-day moving averages, active bulls need to defend this area to keep the trend intact.
Failure to do so does not mark the end of the bull run, but it could give bears a bit more life in the short term.
Two, for those that trade our individual stocks names, we are (hopefully) positioned well with two longs and two shorts, although both sides have been volatile. Keep your size right and we sift through the volatility a bit. I will likely give our trades the opening hour to set their ranges before considering a stop-out (unless the losses turn violent).
Let’s see how it shapes up today.