17th December, 2015
The Federal Reserve announced overnight that it will raise the Fed Fund Rate by 0.25%.
According to CNBC, this is the first time in almost 10 years that the Federal Reserve has initiated a rate hike. It was way back in June 29, 2006 since the last time the Federal Reserve had a rate hike.
According to the Wall Street gurus and media, the US stock market rallied overnight as a result of this latest Fed rate hike.
The Dow Jones Industrial Index rose 1.28%, the S&P500 Index gained 1.45% and the NASDAQ composite index rallied 1.52%.
With the broad market rallying upon the confirmation of the rate hike, what are the implications that we will see going forward?
As a stock investor or trader, should you be bothered by this latest Fed rate hike?
Ignore what the media and Wall Street gurus said about the rate hike
Honestly, all these hype about the fed rate hike and its implications means NOTHING to you as an investor or trader.
When you have enough experience reading news and listening to Wall Street gurus discussing about the implications of economic policies, you will realize that their opinions are simply as good as yours or mine.
What do I mean by this?
On the 18th November 2015, US stocks rallied and The Wall Street Journal credited that to the possible rate increase, as a result of the improving economic conditions.
But one day later on the 19th November 2015 when the stocks declined, Reuters deemed that US stocks dipped due to the rumor that a Dec rate hike could be coming.
And CNN Money gave similar explanations as well.
And when the Federal Reserve finally announced last night about the confirmed rate hike, the market rallied.
MarketWatch said that the move was a vote of confidence in the US economy by the participants.
Seriously, whether the market rallies or declines, the Fed rate hike is always the easy hero or culprit for these media and experts to point the fingers to.
If a Fed rate hike can cause the market to both rise and to fall, then why be bothered by it then?
I hate to admit this but I just want to be honest with you here.
I used to be one of these experts giving my 5cents worth (literally) when I was still employed as an investment analyst in my previous job.
I had the obligation to explain to customers like you why markets react in certain ways.
Crediting the market reaction to any rate hike rumor was simply the easy way and politically correct thing to do.
I had to step out into the media and find some reasons to “explain” why the market reacted, so that you guys can continue to be excited and trade on those reasons.
That was my job and what I was paid to do by my employer, the brokerage research house.
After all, the trading commissions generated from your trades were where my salary and bonuses came from. If there was no reason for you to trade, there was no reason for my existence back then.
The reality was that I didn’t know anything more than you do and my opinions are no wiser than yours.
The only thing I do better than you is that I could make you believe that the market indeed moved because of a particular reason and you should trade on that reason as well!
So what are the implications of the Fed rate hike then?
Whether you like it or not, the stock market trend higher or trend lower due to many different combination of reasons that mere mortals like us will not be able to understand and internalize completely.
Federal Reserve rate hike is simply one of the many possible reasons.
As such, using the Fed rate hike as the sole reason to make your investment decisions could be the silliest thing you can do.
From my years of experience, the only person you can trust is the market. Not the financial gurus nor the media.
The market heads higher or heads lower across the various time horizons, due to the collective decisions made by the participants in the market.
There are all sorts of reasons for someone to start changing his stance in the market.
A proprietary trader with a huge portfolio could decide to liquidate his positions because he needed a break from the market.
A fund manager with tons of money could decide to buy a big chunk of a stock because his astrologer advise him to do so.
Don’t believe me?
Have you heard of George Soros, the billionaire hedge fund manager who almost broke the Bank of England with his trades in 1992?
He famously admited that he changes his position on the market when his backache starts killing him. It has nothing to do with reason. He literally goes into a spasm and it’s this early warning sign that motivates him to react.
And the fact is, when George Soros starts to have backache and decides to liquidate millions or billions of dollars of shares in the market, he is not going to tell you that.
Ironically, his decision to dump his portfolio could have nothing to do with economic policies or the Fed rate hike.
Yet his selling could potentially spook an avalanche of selling from the rest of the market participants and literally cause the market to change its course!
It is the collective actions of these big boys that could change the course of the stock market trend.
Believe it or not, your best chance to notice that coming is by monitoring those stock charts because the price trends on the stock charts reflect the collective behavior of the entire marketplace.
To put it simply, regardless whether there was a Fed rate hike or not, or when did the Fed rate hike occur, your investment decisions should be dependent upon the market’s behavior and not the rate hike.
Let’s take a look at the S&P500 chart to understand the bigger scheme of things.
As you can see, the S&P500 index is still trending higher steadily within an uptrend channel as of today.
Regardless the positive or negative implications as opinionated by the different market gurus in the media, it is a fact that the US stock market is still in a strong and stable bullish state.
There is no cause for concern, as long as this uptrend support remains intact.
Going ahead, the Federal Reserve might raise another 1% or even 2%, or decide to cut interest rates again, but as long as the market continues to trend higher like the above chart, there is no reason for you to start taking any bearish stance on the US market.
As shared in my previous article about navigating stock bubbles, the price to pay for reacting to pure fundamental reasons or economic policy statements could be very high.
What should you do then?
Like what Bruce Kovnar (founder of one of the biggest hedge fund in the world) said in the famous trading book “Market Wizards: Interviews With Top Traders“:
For me, technical analysis is like a thermometer. Fundamentalists who say they are not going to pay any attention to the charts are like a doctor who says he’s not going to take a patient’s temperature. But, of course, that would be sheer folly.
If you are a responsible participant in the market, you always want to know where the market is – whether it is hot and excitable, or cold and stagnant. You want to know everything you can about the market to give you an edge.
Technical analysis reflects the vote of the entire marketplace and, therefore, does pick up unusual behavior. By definition, anything that creates a new chart pattern is something unusual.
It is very important for me to study the details of price action to see if I can observe something about how everybody is voting. Studying the charts is absolutely crucial and alerts me to existing disequilibria and potential changes.
So if you have not started monitoring the charts of the stocks that you have invested in, you should start learning how to do that now.
And once you have an idea how to do so, use the right stock charting software to help you do that.
You will be pleasantly surprised to realize how important it is to be tune with the market, rather than going against it simply by following any pure fundamental policy changes like the Fed rate hike.
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