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August 14, 2015 at 12:55 pm #4149Steven PlaceKeymaster
Aside from China voodoo, the main “risk” that is consuming the investor zeitgeist is the apparent spectre of a Fed rate hike.
Market Mood
The fear generated from the news has been present in any kind of economic report we’ve seen.
It’s been the “costanza trade” where up is down and bad is good.
Did an employment number exceed expectations? That’s bad because it means the Fed has room to hike rates.
Will the upcoming ISM number be a miss? That’s great because the market will rally.
It’s been a series of perverse interpretations, where a good economy is bad for the markets.
However, there are a handful of assumptions that many investors are making:
1. The Fed Is Going To Hike Rates Soon
2. Rate Hikes Are Bad For The Market
3. Rate Hikes Will Spike The Dollar Higher
It’s very possible that these assumptions are proven correct… but they are not set in stone.
And there is precedent in each claim that is contradicted by current or past data.
Is A Rate Hike Coming?
One of the best ways to get eyeballs on screens right now is to bring the nose– what a Fed governor said, what the oil markets are doing, or how the housing market looks.
Tune out the noise.
There are two things to watch:
1. 10 Year Yields
If the market is anticipating a rate increase, investors will start selling bonds as they will be able to get higher yields soon. 10 year yields are an anticipatory indicator of what the Fed will do. So if we start to see yields aggressively rise then you’ll start to see TNX spike.
2. Fed Fund Futures
The CME has something called “Fed Watch,” where it uses the current prices of Fed fund futures to calculate implied odds of a rate hike over a certain period of time.
This is the purest form of prediction as it’s a market where people put actual money on the line.
Aside from those, nothing else really matters. Economists and other crystal ball readers have been notoriously bad at figuring out rates and hikes for years now:
Will A Rate Hike Cause Stocks To Selloff?
I personally think this will be more of a “sell the rumor buy the news” event in September if a rate hike actually comes through.
But going back through past rising rate environments, it has not been a bearish environment for stocks.
There is actually no historical data to suggest a rising rate environment is bad for stocks. As rates *continue* to rise and peak then you have time for concern but considering we’re still coming off of zero odds are this isn’t a peak.
Ray Dalio of Bridgewater Cap has a different opinion about this, and suggests that any kind of tightening will be much more like 1937. I don’t agree, but it is a different opinion. Download Dalio’s Report Here
Will A Rate Hike Cause The Dollar To Rally?
The past two rising rate environments:
In short, no. This could be one of those things where the dollar rallies in anticipation of the event, and after the event there are no buyers left. A “buy the rumor sell the news” kind of event.
Simply put, there’s no guarantee that these assumptions so many people are making are actually true.
This is important because if you’re shorting or buying puts *strictly because* of these assumptions, it’s a bad trade. If you’re using price action and technical analysis based off the market structure that’s a different game.
But you need to question the underlying premises of the claims many market prognosticators are making.
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