The Best Way to Trade the Post-Fed Letdown

2022.12.15 18:44

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The did what everyone expected Wednesday and raised interest rates by another 0.5%. That said, the stock market slipped from its midday highs when the Fed’s forward-looking guidance implied another 0.75% hike was headed our way in 2023. That was slightly more than investors were prepared for.

But as wild as the previous have been for the stock market, Wednesday’s 0.6% decline in the was fairly benign. It was rough getting to -0.6% as the index shed nearly 90 points in the hour after the announcement, but the selling found a bottom in afternoon trade, and the market reclaimed 30 of those 90 points by the close.

S&P 500 Index Daily Chart

While these are still big price swings, volatility decreases as traders get used to our new reality. What could have triggered a multi-percent selloff months ago, this time market seemed content with little more than a half percent decline Wednesday. That suggests the market is not as overextended as the critics claim.

And that makes sense because nearly a year into 2022’s bear market, most overreactive traders have already left the building.

But a loss is a loss, and when combined with Tuesday’s bearish intraday reversal, that suggests more selling pressure at these levels than interest in buying.

As I wrote Tuesday, weakness after the Fed was shortable with a stop above the pre-announcement highs, which is exactly how I traded it. (I came into Wednesday directionally agnostic and was just as willing to buy a pop following the Fed announcement.)

Any further weakness on Thursday or Friday is a clear invitation to add to our short positions with a stop above Wednesday’s intraday highs. If the selling continues, be sure to move our stops down to our entry points to turn this into a low-risk trade.

Limited risk and lots of profit potential, what’s not to like about this trade?

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