Fed interest rate decision looms tomorrow as risk assets face an uphill climb as the pace of higher interest rate hikes gathers momentum.
Current Views
Risk assets like stocks are in a legit bear market. The last time investors had to deal with a bear market was the Dot.Com bubble way back in 2001.
Over the past decade investors have been conditioned to “buy the dip”, and have been rewarded. But now, the playbook for 2022 is sell rallies in risk assets, and the strategy is working.
The problem is way too many investors are still “buying the dip.” Before we bottom, we need to see a legit fear trade. By fear trade I mean a day when the VIX trades above 40. Blood flows in the streets. When we get real fear in the market, risk assets will have a better chance of a sustainable rally.
Until then, it’s probably best to play a tight aggressive style. Use clearly defined risk management, trade smaller size, and be humble. Bear markets are hard to trade.
Key focus points:
- when will interest rate hikes slow (follow the data, CPI stinks)
- seasonal weakness into mid-October
- mid-term election jitters into Nov 9th
- was FedEx’s terrible forecast the beginning of bigger tend for corporate profits?
Trade Update
The Proshares UltraShort S&P 500 ETF (SDS) trade is working. In my last post I stated as part of my risk management approach was to cover before the Fed’s meeting tomorrow. I’m going to stick to my guns and close the trade as planned. See here, and here for trade details.
If I’m wrong no big deal. I can put the trade on again if conditions are right. Full trade outcome write up tomorrow.
S&P 500 Index ETF (SPY)
Conclusion
Fed interest rate decision looms tomorrow as risk assets face an uphill climb as the pace of higher interest rate hikes gathers momentum.
Trading bear markets is tough. It’s never easy. Worse yet, the current thinking that it’s okay to “buy the dip” is misplaced, in my opinion. To be sure, risk assets are going to face a tough road ahead.
Long-term passive investors care less about short-term fluctuations like what I’m describing here. However, if you must invest capital immediately, dollar cost averaging into US mid-term elections and/or buying into weakness (VIX > 40) makes sense.
Thanks for reading!
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Invest at your own risk. Trade your own view. Do your own due diligence.
