Will the Federal Reserve Kill the Stock Market Bounce?

A recent article from MarketWatch cites much debate over whether the Federal Reserve will Increase Interest rates by 0.75% or more later this month as they did In June or push It to a full 1%. Two Friday's ago, economic data Included some signs of Improvement or steadying which has some traders lowering their expectations for a full 1% hike, however, the bigger issue for markets Is the 9.1% Inflation rate which hasn't peaked yet.

This Is obviously super Important to financial markets and traders because of the possible scenario whereby Inflation peaks and the central banks can back away from further Interest rate hikes avoiding a possible U.S. economic recession. On the other hand, there Is also the more pessimistic possibility that Inflation doesn't subside and the Federal Reserve Is forced to Increase Interest rates which tanks the economy.

In this post, I will explain what has happened so far, what the possibilities are, and what this could mean for your portfolio.

Financial markets which are by nature optimistic struggle to deal with the more pessimistic scenario which Is why the markets soured just a month ago when the Fed had a 75-basis point hike. That was the biggest since 1994. Today, with Inflation coming in hotter than expected at 9.1% traders are pricing in a 31% chance of a 100-point hike and a 69% chance for a 75-point hike according to MarketWatch and the CME FedWatch Tool.

Of course, the problem now Is not with whether the hike will be 75 points or 100 points, it's how long Inflation says this way before turning lower. We will find out when the Fed releases Its policy update on Wednesday

Although financial markets have been said to be fast-moving and forward-looking, they have had a hard time letting go of the Idea that Inflation will subside says the article. June's numbers showed nearly every component of Inflation coming in stronger than expected. Ahead of the Fed's decision, "there will be dislocations across assets, there's no other way to put It." says one economist at Wells Fargo Securities.

A lack of liquidity has created gaps in the bid and ask price due to the absence of buyers and abundance of sellers. We are getting Inflation that Is so different from what the market expects, and players are so out of position that the market can't adjust to this Information quickly says another strategist.

While the news of the Fed will certainly Impact financial markets, I think earning season may be more telling. If a stock’s price Is based on forward looking earnings, then as earnings go so do the stock price. That said, if you are Interested In where the market will go next, then look no further than this quarter's earnings reports and this week should be an Influential one with stocks like Apple (AAPL), Amazon (AMZN) and Alphabet (GOOG), and Microsoft (MSFT) set to report this week.

These stocks are four the size heaviest weighted stocks in both the Nasdaq and four of the ten heaviest on the broader S&P 500. While it is possible that earning become a catalyst for higher highs in each of these stocks, they all look very shortable in their current condition. GOOG was already a short sale on the break of the 50-day SMA last week, AMZN Is approaching double top territory around $130, AAPL Is approaching the 200-day SMA where It may become shortable, and MSFT Is currently flashing a short sale entry on a break of the 50-day SMA.

GOOG

AAPL

AMZN

MSFT

Since three out of four stocks follow the general market and the Nasdaq heavyweights make up nearly half of the Nasdaq, then you can rest assure that the general market will be Impacted by the earnings and most probably any stocks that you may be Interested In. A quick look at the general market and I think It Is pretty plain to see that we are in a downtrend still and that this recent rally Is nothing more than a bear market rally In a longer-term down trend

So, what can you do? Earnings season in full swing, I would say be flexible because anything can happen and realize that we are still in a bear market downtrend. Going through my charts this weekend In addition to the bearish stance found In heavyweights like AAPL, AMZN, MSFT, and GOOG, I also found many more potential short sales setups. On the other hand, I found very few long stock setups and no new potential leadership of any quality. If we look at the market from a perspective of what It Is making available to us, then It Is easy to see that the path of least resistance Is on the short side for now.