Coiled Spring Capital Mid-week update 11/2/22

FOMC day is never easy. The minutes were released, and the market rallied immediately as the indication that the Fed would slow the pace of hikes. This reality had been being built into the stock market since the post CPI rally. We have always maintained that the key to holding a sustainable rally was that the bond market had to stop going up. Every time an adjustment is made to the terminal rate, we see a negative and volatile reaction in stocks. In Powell's press commentary he cited specifically that the terminal rate may need to go higher.

While Fed Fund Futures are now pricing in 100% probability of a 50 bps hike in Dec, rate cut expectations were slightly pushed out. The cuts are now being forecast for July vs May previously, with the terminal rate higher.

This is now causing the 3 month vs 10 yr curve to invert for the first time this cycle. The 3 month/10 yr has historically been a more accurate predictor of recessions.

As disappointing as it was to see Powell tank the market, again, we prepared our members to exit any residual tactical longs prior to the event. It was actually an easy determination as our short-term internal metrics were too stretched, leaving the risk/reward into the event, poor. Being bullish near the lows and exiting on strength pre-FOMC yielded +300-400 SPX points, but more importantly it kept us on the right side of the counter trend rally.

Last weekend in our Macro Report, we discussed exiting any residual tactical longs into the FOMC. Here is that excerpt:

If you wish to read our post FOMC analysis and our thoughts on near term market direction, we encourage becoming a premium member. Sometimes NOT being on the wrong side of the market is just as important as being on the right side.

Subscribe to Premium to read the rest.