Before jumping into Fed meeting expectations, probabilities, and actionable trades for next week, a quick overview of this week.
This was our expectation coming into the week (what we told our paid subscribers last time):
…next week, after inauguration day (Jan 20th - also a holiday in the US, markets are closed), we might actually see another decent rally driven by pure investor optimism. And then some sideways consolidation coming into FOMC on Jan 29th.
Pretty much exactly what happened; markets rallied on Tue and Wed, after inauguration day, confirmed the break above SMAs (see below), broke through the previous top (6,100, Dec 6th high), thus ending the period of decline since mid-December, and are trading at new all time highs, ending the week at - interestingly - exactly 6,100.
This is why we also said the following immediately afterwards:
Holding shorts now (in the form of puts on SPX or NDX) would not be an ideal trade. If the blow-off top occurs they will lose value quickly as we might wait for a correction for another 6 months or so.
This is not yet the blow-off top, mind you. 6,100 would need to hold as new support for it to be a blow-off top, otherwise it’s a false breakout. And we reengage the correction.
Each of these scenarios hinge exclusively on what we hear from the Fed on Wednesday.
To make things all the more interesting, Trump had a speech on Thursday where he demanded that interest rates go down. This puts immense pressure on Chairman Powell. If he maintains rates at current levels, and sends out a hawkish signal (as in December), we get a strong correction on markets, but he also agitates Trump who is likely to name his new nominee for Fed Chairman. Powell’s term ends next January, but if Trump nominates a so-called “shadow Chairman”, then markets are more likely to react to the shadow Chairman’s signals than Powell’s. In other words, this FOMC might be the last time Powell moves markets.
On the other hand, Powell might succumb to pressure and signal more rate cuts than anticipated. This will deliver a huge rally on markets (we get a blow-off top for sure), but is setting us up for an even bigger correction down the line.
So today, let’s talk about what Powell might do, and how to position in each case.
Subscribe to read the playbook + a brief follow-up of the USD trade, in light of the latest Bank of Japan rate hike this week.