top of page

Navigating the Upcoming Fed Meeting

Both the short-term and mid-term signals flipped red last week. This means that we should expect increased volatility in the coming weeks. The long-term RiskSIGNAL remains green but it has been breaking down since July 27th. Remember, the long-term signal is reactive by design so it should take longer to rollover.

Even though there are evident signs of deteriorating credit conditions, with credit card default rates rising to record highs and an accelerating rate of bankruptcies, the bond market currently appears unconcerned. If utilities maintain their resilience and Treasuries surge, it might suggest we're on the brink of a more extensive market downturn.

On both Friday and Monday, within our momentum portfolios, we rotated out of high-beta stocks to more defensive low-beta stocks like utilities, equal-weight ETFs, and low volatility ETFs.

This strategy of decreasing beta, without cutting exposure to equities allows us to: Reduce risk ahead of market volatility (lose less than the overall market) while still providing us an opportunity to capture some upside if the signals are wrong. We cannot do this if we move to 100% cash.

The Fed is expected to give the market a hawkish pause so I expect the market to respond with more inflation so we are maintaining our positions in gold and energy.

We have not raised cash levels yet. But, if our mid-term indicators continue to confirm that conditions are getting worse, we will not hesitate to raise cash levels 20-30%.

Our global macro strategy remains active with core asset allocations to:

  • Emerging Markets: India, Japan, and just placed Vietnam on our watchlist

  • Commodities: Uranium and Nuclear Energy, Gold, Gasoline, Energy, Oil and Gas Exploration

  • US Stocks: DKNG, GOOGL, META, AMZN, and NVDA

  • Shorts Positions: Small-Caps, S&P 500, and Bitcoin (0.5%-2% position sizes)

Fed Preview

In today's highly anticipated Federal Reserve (Fed) meeting, we expect to witness a pivotal change in the market's perspective. Over the last 18 months, the primary question on everyone's mind has been, "How high will rates go?" Now, the emphasis is shifting to, "How long will these rates remain elevated?" The longevity of these high rates will now serve as a litmus test to gauge if a Fed remark or decision leans hawkish (bad for stocks/bonds) or dovish (good for stocks/bonds).

The belief that the Fed may have concluded or is nearing the end of its rate hikes has been a crucial underpinning for the stock rally we've seen since May. It is vital, then, that the Fed doesn't throw any hawkish curveballs. If they signal a plan to maintain elevated rates for an extended period, we could see the market retract by as much as 5%, possibly even 10%. Such a vulnerability can be attributed partly to fundamental reasons – prolonged high rates act as a drag on stock valuations. However, there's another concern: complacency. Unlike the start of 2023 or the beginning of this rally in March, we don’t have the benefit of negative sentiment and low expectations. Instead, it’s the opposite:

High expectations and complacency.

Bottom line, a more hawkish-than-expected Fed is a negative for this market over the medium and longer term, and for this rally to continue markets need, at a minimum, for the Fed to meet current expectations and, ideally, hint at rate cuts sooner rather than later. I don’t see the Fed cutting rates at all this year but that is what the market needs to hear.

Criteria for a Hawkish Fed (bad for stocks):

  • The Fed raises rates by 0.25%

  • The 2024 projection "dots" goes up to 4.875%.

Market Reaction (none of this is priced into stocks)

  • Immediate Impact: A pronounced drop is anticipated. Either of the hawkish surprises would likely trigger a surge in the 2-year Treasury yield, potentially by as much as 20 bps. This is because the market isn't bracing itself for any rate adjustments or a higher dot projection.

  • Sector Analysis: Defensive sectors (utilities, healthcare, and staples) should hold up better as investors position for a growth slowdown, but I’d expect all 11 S&P 500 sectors to be lower on the day. Technology, communications, and consumer discretionary will lead the market sell-off.

  • Treasuries: Treasuries will fall hard, with the 2-year yield rising more than the 10-year yield and further inverting the 10s-2s yield curve.

  • Dollar & Gold: The greenback will surge likely above 106 and gold will get hit hard.

Criteria for a Dovish Fed (good for stocks)

  • The forward guidance changes, hinting at a pause in rate hikes.

  • The 2023 projection drop to 5.375%.

Market Reaction:

  • Immediate Impact: Expect a strong rally with every sector in the S&P 500 ending the day positive…

  • Sector Analysis: Defensive stocks and financials should lag the market while tech, communications, and consumer discretionary would lead the rally.

  • Treasuries: Will rally, with the 2-year yield dropping significantly, possibly by up to 20 bps. The 10-year yield should also fall, but by a smaller margin.

  • Dollar & Gold: The greenback will drop sharply to 104 and gold should see a strong rally.

Key Technicals to Watch

The S&P 500 currently sits in the middle of a trading range established since the lows of August. To the upside, last week's closing high was 4,505. If the index rises beyond this after the Fed meeting, it could be a positive sign. A closing above 4,505 would be mildly positive, but surpassing the August closing high of 4,515 would be a stronger technical indicator of a sustained upward move. On the downside, the August closing low of 4,370 is the first support level, followed by the August opening low of 4,345 as the secondary support level. If the index falls below 4,370, which is just 1.64% below yesterday's close, it would indicate that we could expect a break in the uptrend for stocks in the upcoming weeks.

The 10-Year Treasury Note finished with a yield of 4.365%, the highest it's been since 2007. If the yield closes higher today, it will solidify the trend of increasing yields. The recent peak suggests a potential rise to 4.59%, which is a level to monitor if yields keep going up significantly. On the flip side, there's an established upward support at 4.24% from the lows of July. This means if the yields were to drop abruptly, they might stabilize or hesitate around this number.

The Dollar Index has risen consistently with Treasury yields since reaching its bottom point this summer. For those bullish on the dollar in the long term, surpassing the 2023 high of 105.67 is crucial as it would solidify an upward primary trend. Meanwhile, there's a support trend at 104.75 that might stabilize the green back should it drop today. If it closes below this trendline, it could signal potential profit-taking, which might further push down the dollar in upcoming trading days.

The market's commonly referred to "fear gauge," the VIX, dropped to levels last seen before the pandemic just last week. However, a significant reversal on Friday suggests that a short-term bottom might have been reached. Much like the S&P 500, the VIX is currently centered within a range as we approach the Federal Reserve's announcement. On the upside, if the VIX exceeds last week’s high of 15.69, it would indicate a mild increase in market uncertainty. A surpassing of the intraday high from August at 18.88, or a close above the previous month's high of 17.89, would be stronger indicators of potential increased market volatility and potential losses ahead.

The market is at a crossroads today, with significant anticipation around the Fed meeting. The outcome could be uneventful, but there's also a risk that an unforeseen policy change might surprise many investors, leading to increased volatility. Notably, strength indicators in both the S&P 500 and the VIX hint at a higher chance of stock market declines and growing volatility, which leans towards the possibility of a more hawkish decision from the Fed today. On the other hand, these same strength indicators haven't reinforced the recent uptrends in yields and the Dollar Index, suggesting that a more dovish stance from the Fed could be on the horizon.

Bottom line: while it's highly unlikely that we'll see rate hikes at todays Fed meeting, the potential still exists for either a hawkish or dovish surprise. The market's reaction will hinge on three main factors: 1) Any changes in rates, 2) Updates to forward guidance, and 3) Adjustments in the “dots”, specifically observing if the 2024 dot shifts upwards (indicating a hawkish stance) or if the 2023 dot moves downward (suggesting a dovish outlook).

And remember - the one fact pertaining to all conditions is that they will change.

Feel free to reach out to me and use me as a sounding board.

Best regards,


Kurt S. Altrichter, CRPS®

Fiduciary Advisor | President


Commenting has been turned off.
bottom of page