The Fed confirmed yesterday that it would raise interest rates by 0.75%. The 10-year note is trading below three-quarters of a point at 2.69, making the S&P and stocks undervalued. Therefore, we don’t recommends shorting the stock market. We have been telling our traders over the past few weeks that we are looking for confirmation of the bottom. Since March 2020, we’ve seen the 10-year note go from 0.33% to 3.5%, something the mainstream media hasn’t focused on, if at all.
This was a major historical change in terms of the cost of money and the effect of borrowing on all who borrowed at the old near-free money levels. People could borrow at near zero interest rates and invest in stocks for a big return. Then interest rates rose, ending that ability to borrow cheaply and invest in a booming stock market.
With higher interest rates, Third World debt is in serious jeopardy, just like anyone who was heavily indebted to invest in stocks, commodities, real estate or anything else. We are only just beginning to see the consequences of rising interest rates. The euro is in trouble; now at par with the US dollar. Everyone sells other currencies and buys dollars. It’s a flight to safety, but that doesn’t mean the US dollar is in very good shape. We could have another credit crisis. The Fed is unlikely to raise interest rates again on top of the $30 trillion in debt in the United States. If it raises rates too much, defaults could drag the economy down and the Fed itself will have to pay more interest on its borrowings.
Yield is now inverted, with short-term and long-term rates inverted, indicating that we may be heading into a recession. The market has already priced in a further rise in interest rates. If you hear the media talking about something, it has already been priced into the market. The quarter-point increase did not cause the stock market to fall because the increase had already been priced in.
The Fed’s moves appear to be bullish for stocks as the market discounts higher interest rates and faces the possibility that the Fed may need to turn around and start cutting rates. The Fed might even have to print more money and create more stimulus. All warmongering is an attempt to manipulate the market, without the Fed having to do anything. Now the Fed really needs to act.
The market is already discounting even another 0.75 rate hike, although we wouldn’t be surprised if there was a pause in interest rate hikes or even a rate cut. If that happens, it would be extremely bullish for stocks.
The monetary system and currencies are in a state of chaos. Along with all the money printing and stimulus, it destroyed the purchasing power of all currencies. We’re getting to a point where we’re going to put real value on real assets, like precious metals.
Standard deviation and reversion to the mean
The Fed announced that it would raise interest rates by three quarters of a point and today, July 29, 2022, the markets are reacting. The opening was quiet today. The S&P E-Mini is up 36.50. The metals pull back a bit after running yesterday. The December Gold contract reached $1784.60 around midnight last night. The standard deviation of the market, identified by the Variable Price Momentum Indicator (VC PMI), tells us when we can expect a mean reversion to occur.
The market reached a sell level 1 of $1782. The VC PMI identified that from this level the market activated a short trigger at 1am with a weekly sell 2 level target of $1774. Now the daily and weekly short signals have been activated with a target of $1766. There was some profit taking this morning after yesterday’s phenomenal rally.
We recommend our traders to trade on the long side. The market seems to be a bit overbought.
The NASDAQ also continues to hold its gain. The market hit 12,948 last night and we saw a bit of a pullback happening. It hit 12,774, which was the VC PMI’s target. It hit the weekly standard deviation and then came back from there. 12,908 is a 32.8% Fibonacci retracement from the high we saw last week. The weekly and daily targets stand at around 13,273. There is a harmonic relationship between the weekly and daily targets, so the market is very likely to reach this level and then fall back towards the average. We recommend taking profits off the table if you are long. We are now looking for a peak in the 13,273 area when we take more profits.
Equity Management Academy CEO Patrick MontesDeOca said, “I recommend going long in the market, especially in sectors that have been battered by all this talk of rising interest rates.”