Dan Passarelli, CEO - Market Taker Mentoring

The market is back into a risk off sort of mood. The S&P 500 is down close to 4% today (6/13/22). Pretty big move in this bear market. And the question, of course, is, why? And the answer, of course, is that there are a number of thought leaders; market thought leaders, who are coming out, and they're saying that maybe there's a better chance of the Fed raising interest Rates 75 basis points at the next Fed meeting, which is in two days. Rather than the previously expected 50 basis points.

Now we've got a couple of tools that we can look at here, and one is this [see the video]: It is the countdown to the Fed which is published on the Cmegroup.com websites right now. The current target rate that the Fed Keeps for its interest rates is 75 to 100 basis points and these probabilities are based off the trading price of the Fed funds rate futures.

And so the folks who trade the Fed funds futures are basically pricing into those futures about a 71.6% chance of a 50 basis point hike and a 28.4% chance of that 75% rate hike. Now, what are the implications to this?

If we do get that (what was previously thought to be a surprise) 75 basis point hike? There's a couple of things. Clearly, they're raising that rate to try and fight inflation. And what that does is it cools down the economy. It stops people from all the money that's out there, people spending it aggressively, driving prices up higher, so it's basically a tool to fight inflation.

But when it comes to the stock market, the implications there are: what's priced in? Right?

Because if we look back to just last week, last Thursday or so, we're trading up around 414. And today, just four sessions later, we had a couple of gaps lower, busting through the 20 day moving average, and we made a new low of 373.

So is the market pricing in a 75 basis point hike? Well, we're going to find out after that number is released, because if the Fed does raise interest rates 75 basis points, then I believe that a lot of that is priced in and the market may not fall that much. All right. Now, we could have a knee jerk reaction where the market kind of drops right afterwards, but I would not be surprised to see it kind of hang in there and possibly even be up on the day if that happens.

Now, that said, if the Fed only cuts by 50 basis points, I would expect to see the market rise a great deal unless that is immediately followed by guidance of the Fed saying that they plan to get yet more aggressive in the future.

So that said, we've got some exciting stuff to watch here. And it's all coming to a head in less than 48 hours. We've got the VIX at 34 points. Could be an interesting case for some put credit spreads for folks who are in the same camp as what I just said. Possibly leading to a more bullish bias given the two potential outcomes.