Last week, I talked about how the Fed “jawbones” the stock market and the economy. It’s a fairly simple idea – investors will respond to what the Fed says about inflation and what it plans to do with interest rates every bit as much as what the Fed does with interest rates.
As an example, just look at the rates for a home mortgage loan. You’ll pay just about 7% for a loan to buy a house these days, even though the Fed’s interest rate level is much lower, at 3.25%. The reason for this wide is the Fed’s jawboning.
The Fed has been adamant that interest rates will rise to 4.5%-5% to impact inflation. So in order to keep the spread at 2% (the “spread” is where banks’ profit on loans comes from), banks are charging 7% for 30-year loans.
From ~2.2% at the start of 2022, 7% mortgage rates have crushed the housing market. Where you could afford a $700,00 house a year ago, you’re now looking at a house in the $450,000 range. That’s just one domino in a line that gets longer almost every day.
At some point, the cost of money gets so high that entire industries start to break down. Builders stop building if no one’s buying houses, and workers get laid off. When home values fall, homeowners feel less wealthy, and they’ll cut back on spending. The dominos start to fall…
So, last week, I told you that:
Big investors know that if the Fed keeps going, things are going to break. And the reason that we have a window of opportunity for an upside move is because big investors like JP Morgan and Goldman Sachs and the rest are betting that Powell is about to ease up on interest rates.
The Fed is About to Pivot
And right on cue, Fed governors began jawboning about the end (or at least a slowdown) of this rate hike cycle.
- San Francisco Fed president Mary Daly said: “We might find ourselves, and the markets have certainly priced this in, with another 75-basis-point increase…But I would really recommend people don't take that away and think, well it's 75 forever…”the time is now to start talking about stepping down. The time is now to start planning for stepping down.”
- Chicago Fed president Charles Evans said that even after the most recent inflation data showed little progress through September, he still felt the Fed's current projection of a target policy rate that reaches a range between 4.5 and 4.75% next year would be adequate. “I worry that it's sort of a nonlinear kind of impact … with businesses becoming very pessimistic and changing their strategies in a sort of notable way,” once rates reach a certain point, Evans said.
- In an interview with Reuters last week, St. Louis Fed President Fred Bullard said, “if it was today, I'd go ahead with” a hike of the same magnitude in December, though he added it was “too early to prejudge” what to do at that final meeting of the year.
And then, over the weekend, the Wall Street Journal put the exclamation point on what the Fed had been hinting at all week with this headline: Fed Set to Raise Rates by 0.75 and Debate Size of Future Hikes.
Ladies and gentlemen, we have a pivot…
The Week Ahead
The stock market is always forward-looking. We took great advantage of expectations for a Fed pivot with last Monday’s trading plan. Those Aehr Systems (NASDAQ: AEHR) calls returned a sweet 240% profit.
The Jumia (NASDAQ: JMIA) and StoneCo (NASDAQ: STNE) trades did not fare as well. Sadly, the Jumia call trade is probably a lost cause. But StoneCo could still have a nice surprise for us this week…
STNE has found support on its 50-day moving average (purple line) at $10, and it is working on taking out resistance at its 200-day moving average (black line) at $10.61. If the stock beats that $10.61 mark, we should get a quick move up to the $11.30 area.
Looking ahead to the market this week, I’d say that we are out of the Fed-frying pan for now. But we’ve jumped right into the earnings fire. 30% of the S&P 500 reports this week, so expectations about earnings results and forward guidance will rule the action.
Twilio (NASDAQ: TWLO)
I have just one trade I’m looking at. One of my fave’s, Twilio (NASDAQ: TWLO), is trying to set up a solid move higher…
This is a very simple trade plan. As you can see, TWLO has been unable to break above its 50-day moving average for months. That 50-day MA has been strong resistance, obvs. Today, TWLO’s 50-day moving average sits at $72.63. The stock has already tried and failed to break over that level at the day’s open. I think it’ll try again and succeed soon, maybe later today, maybe tomorrow.
Twilio reports earnings next week, November 3. I’d expect some enthusiasm to creep into the share price before Twilio reports.
Until next time,
The Profit Sector