Be ready for some fire work next week

The market was largely not exciting last week with a very tight range of moving around. But this may likely change next week. Who so? Well we are heading into one of the most watched days on Wed next week, the Fed meeting that will decide the next short term interest rate. This is not only a closely and nervously watched day in the US but a global event actually. And it often is a market mover. So how the market will react to the Fed interest decision? Of course it is like a gambling to decisively bet for one direction or the other. But as always I'm fine to put out my thoughts in advance for fun. And personally I think the fire work will be more likely played out to the downside. Why?


There are basically 3 scenarios the market will react to the Fed decision: positive, neutral and negative. The market has already priced in the neutral position that virtually 100% chance that Fed will increase the interest with 25 base points (0.25%) and two more in the year. The thing the market is closely watching is how the Fed will predict the future direction of the rate increase, hawkish (more fast pace of interest hike) or dovish (slower pace). If their tone is deemed more dovish, i.e. less interest rate increases during the year, it will be a great positive surprise to the market that will trigger a good up run for stocks. But I think this is less likely in my mind. Like it or not, the Trump administration is doing everything more favorable for the economy in general although the  potential trade war is a bit worrisome for the market. But I really think people have largely misunderstood Trump for this part and I think there is a good chance he will make it work without real trade wars but better and more favorable trading conditions for the US. The overall trend is quite inflationary moving forward due to more economic expansion expected in the US in the next few years. As such, there is less chance for Fed to slow down the interest rate hike as they are more concerned about the inflation that is hard to control if they are not ahead of the curve. That's why I think the more likely surprise is their more hawkish assessment about the economic prospects, implying more rate increases in the rest of the year. If any such hint perceived by the market, just watch for a sharp decline of the market.


For myself, I'm prepared for either scenario. I'm more lining towards the downside reaction and have many cost-free puts in place to enjoy it if it happens. As a general pattern, the first two trading days prior to the Feb meeting are usually positive and you may expect some gains for Mon and Tue. The real market moving moment will come after 2 PM on Wed and possibly continue for the remaining of the week.