Yesterday was Fed day and it didn’t disappoint.
After spending the morning in the red, the S&P 500 turned positive after the Fed raised interest rates by the widely expected 0.75% and said the rate of future hikes would slow. Unfortunately, the relief proved fleeting and an hour later stocks tumbled from those midday highs, ultimately finishing the day down 2.5%.
My guess was the index would rally if the Fed did what it said it was going to do, but after a few weeks of up, investors had higher expectations and that left stocks vulnerable to disappointment. When Powell’s comments suggested rates could peak higher than previously expected, investors started pulling the plug and once the wave of selling started, there was no stopping it.
Lucky for me, I’m not a stubborn trader. While I was pleased to see the initial push into the green, when the air started coming out of that rally less than an hour later, that was my signal something was off. And after falling into the red, the market’s disappointment became undeniable and all bets were off.
Buy strength and sell weakness was the plan coming into the day and we knew the odds of a head-fake were high. As it turned out, the initial strength was the head fake and the reversal into the red was our signal to get out and for the most aggressive to short the market.
While that sounds easy in hindsight, nothing in the market is ever easy. During that midday surge, bulls were beating their chest and bears were running for cover. And an hour later, the script flipped. Easy come easy go. But as nimble traders, we are perfectly suited to turn on a dime alongside the market.
When a trade stops working, we pull the plug, no excuses. And in volatile markets like this, a dramatic reversal becomes our invitation to throw on a trade in the opposite direction.
Being flexible enough to switch our outlook midstream is never easy, but it sure is a lot more profitable than sticking with a losing trade. With practice, you will be able to do it too.