Why the Market Is Shrugging Off the Fed’s Rate Hike

Why the Market Is Shrugging Off the Fed’s Rate Hike

Posted On March 17, 2022 3:59 pm

Yesterday’s interest rate hike, the first since 2018, led to some eye-popping moves across assets, indexes, and individual names. 

Stocks seem to be digesting the news well as the SPDR S&P 500 (SPY) logged back-to-back 2%+ up days, something that’s only occurred 13 times in the past 50 years. The Nasdaq 100 (QQQ) performed even better, gaining 6.6% in the past two days; both are adding to those gains today. 

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However, the U.S market rally was dwarfed by China’s market, which saw the Hang Seng jump 13.1% in the past two days after the government stated they’d essentially prop up their real estate and stock markets and they’d lessen the crackdown and regulations on tech stocks. 

The popular U.S-listed ETF, the Kraneshares China Internet Fund (KWEB) jumped 25% in two days as names like Alibaba (BABA) and Didi (DIDI) soared 25% and 52%, respectively. It still leaves KWEB and the others down some 60% in the past six months. However, it has seemingly stopped the bleeding. 

Basically, China succumbed to market forces, realizing its “common prosperity”  plan won’t work if there is no prosperity to redistribute.  The timing of China’s move was impeccable to get the most bang from the yuan as it came the day after JP Morgan (JPM) put out a high profile report, downgrading 28 China ADRs such as BABA and JD.com (JD); calling Chinese stocks “uninvestable.”  The JPM analysts were left with egg on their faces and any fresh shorts had their faces ripped off. 

I took a look at some of the names and KWEB, and I think we need to wait for the dust to settle before stepping into the fray.  I wouldn’t call China uninvestable. but right now it’s untradeable as the moves are too insane. 

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In the U.S., the Fed finally took the first step towards normalizing monetary policy with a measly quarter-point rate hike. Stocks are handling it well while the bond market screams for more as the 2/10 year spread narrowed to just 15 basis points. An inverted yield curve, when 2-year notes have a higher rate than 10-year notes, is a precursor to a recession.  However, with the ‘big bad event’ out of the way, there was a sigh of relief and the VIX dropped below the 30 level for the first time in two weeks.  Full disclosure; Options360 position in VIX options of a bearish butterfly spread tied to the April futures. 

A lot of people are saying the low is in, especially in some beaten-down tech names.  I’m watching some cloud names and cybersecurity such as Crowdstrike (CRWD) for bullish plays for Options360. We will keep it on a tight leash, as I still think these upside rips are still rallies within a longer-term downtrend. 

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About author

Steve Smith

Steve Smith have been involved in all facets of the investment industry in a variety of roles ranging from speculator, educator, manager and advisor. This has taken him from the trading floors of Chicago to hedge funds on Wall Street to the world online. From 1987 to 1996, he served as a market maker at the Chicago Board of Options Exchange (CBOE) and Chicago Board of Trade (CBOT). From 1997 to 2007, he was a Senior Columnist and Managing Editor for TheStreet.com, handling their Option Alert and Short Report newsletters. The Option Alert was awarded the MIN “best business newsletter” in 2006. From 2009 to 2013, Smith was a Senior Columnist and Managing Editor for Minyanville’s OptionSmith newsletter, as well as a Risk Manager Consultant for New Vernon Capital LLC. Smith acted as an advisor to build models and option strategies to reduce portfolio exposure and enhance returns for the four main funds. Since 2015, he has worked for Adam Mesh Trading Group. There, he has managed Options360 and Earning 360, been co-leader of Option Academy, and contributed to The Option Specialist website.