The Fed yesterday confirmed that the Fed was going to raise interest rates .75 percent. The 10-Year Note is trading below three-quarters of a point at 2.69, which makes the S&P and stocks undervalued. Therefore, we do not recommend shorting the stock market. We have been telling our traders over the past few weeks that we are looking for a bottom confirmation. Since March 2020, we have seen the 10-Year Note rise from 0.33 percent to 3.5 percent, which the mainstream media has not focused on, if at all.
That was a major historic move in terms of the cost of money and the effect of borrowing on everyone who was borrowing at the old, almost free-money levels. People could borrow at almost zero interest rates and invest in stocks for a major return. Then interest rates rose, which ended that ability to borrow cheaply and invest in a roaring stock market.
With higher interest rates, Third World debt is at grave risk, as is anyone who was heavily in debt to invest in stocks, commodities, real estate, or anything else. We are just beginning to see the consequences of the rise in interest rates. The euro is in trouble; now at parity with the U.S. dollar. Everyone is selling other currencies and buying dollars. It is a flight to safety, but it doesn’t mean the U.S. dollar is very healthy. We could have another credit crisis. It is unlikely the Fed will raise interest rates again on top of the $30 trillion in debt in the U.S. If they raise rates too much, defaults could crash the economy and the Fed itself has to pay more interest on its borrowing.
The yield is now inverted, with short term and long-term rates inverted, which indicates we may be heading into a recession. The market has already discounted another rise in interest rates. If you hear the media talking about something, then it has already been taken into account by the market. The quarter point increase did not crash the stock market because the increase had already been factored into prices.
The Fed's moves appear to be bullish for stocks as the market discounts the rise in interest rates and deal with the possibility that the Fed may have to do a U-turn and start to lower rates. The Fed may even have to print more money and create more stimulus. All of the hawkish talk is an attempt to manipulate the market, without the Fed having to do anything. Now the Fed is having to actually act.
The market is already discounting even another .75 increase in rates, although we would not be surprised if there was a pause in interest rate hikes or even a lowering of rates. If that happens, it would be extremely bullish for stocks.
The monetary system and currencies are in a state of chaos. With all of the printing of money and stimulus, it has destroyed the purchasing power of all currencies. We are reaching a point where we are going to place real value on real assets, such as precious metals.
The Fed announced that they would raise interest rates three-quarters of a point and today, July 29, 2022, the markets are reacting. It has been a quiet opening today. The E-Mini S&P is up 36.50. The metals are pulling back a bit after running up yesterday. The December Gold contract hit $1784.60 at about 12 am last night. The standard deviation of the market, which the Variable Changing Price Momentum Indicator (VC PMI) identifies, tells us when we can expect a reversion to the mean to occur.
The market hit a Sell 1 level of $1782. The VC PMI identified that from that level, the market activated a short trigger at 1 am with a target of the weekly Sell 2 level of $1774. Now the daily and weekly short signals have been activated with the target of $1766. There was a bit of profit taking this morning after the phenomenal rally yesterday.
We are recommending that our traders trade from the long side. The market appears to be a little overbought.
The NASDAQ continues to hold onto its gain, too. The market hit 12,948 last night and we saw a bit of a reversion unfold. It hit 12,774, which was the VC PMI target. It reached the weekly standard deviation and then reverted back from there. 12,908 is a 32.8 percent Fibonacci retracement from the high we saw last week. The weekly and daily targets run up to about 13,273. There is a harmonic relationship between the weekly and daily targets, so the market is highly likely to hit that level and then revert back down toward the mean. We recommend taking profits off the table if you are long. Now we are looking for a spike move into the 13,273 area when we will take more profits.
Equity Management Academy CEO, Patrick MontesDeOca, said, “I am recommending going long in the market, especially in sectors that have been battered by all this talk about rising interest rates.”
To learn more about how the VC PMI works and receive weekly reports on the E-mini, gold and silver, check out our Marketplace service, Mean Reversion Trading.
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The Equity Management Academy (EMA2trade.com) was founded based on a belief in the power of education to change lives. After thirty years of trading in markets from New York to Chicago, CEO Patrick MontesDeOca founded the Academy to pass on all he had learned about the financial markets to help traders from neophytes to veterans become more effective at transforming knowledge into wealth. His knowledge is embodied in the fully automated proprietary trading program: the Variable Changing Price Momentum Indicator (VC PMI). The Academy also assists institutional traders and hedgers.
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Seeking Alpha reports are based on the VC PMI analysis of various markets and written by Scot Macdonald, PhD, who is the Director of Research for the Equity Management Academy. He has a doctorate from the University of Southern California with a focus on international political economy. He was a broker and analyst at the largest independent brokerage firm in the western United States for five years. He has researched, written and edited financial articles for more than a decade. He is the author of nine books, including research on decision making and the use of lessons from the past to make current decisions. For information on his books, please visit www.KerreraHousePress.com.
Disclosure: I/we have a beneficial long position in the shares of GDX either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.