The market will remain volatile until the FOMC meeting in March. The odds of a 50 basis point rate hike are now at 100% a month from now and that is up from 50% just a week ago. Furthermore, a 100% chance of a 100 basis point rate hike is price in for the next three meetings. The S&P 500 closed below the 200-day MA last Friday and that was a key support level. Swing traders exited that swing trade for a profit. We will wait for the volatility to settle down.

The CPI came in at .6% Thursday and that was higher than the .4% analysts were expecting. The PPI will be posted tomorrow.

The market does not like “shocks” and the Fed got inflation wrong! The Fed is playing catch-up and real yields (interest rates less inflation) are deeply in negative territory. As I noted last week Fed officials and institutions are quickly ratcheting up their projections for rate hikes. If the 5-year US Treasury yield is at 1.9% and inflation is at 7%, bond holders are generating a negative real return of 5.1%.

The first wave of Fed tightening is never received well by the market and we are seeing those nervous jitters. In time, Asset Managers start buying when they confirm that tightening did not stifle economic growth. This could take many months to play out, but some of the biggest market rallies have come during periods of rising interest rates. Ideally, the interest rate hikes are the result of strong economic growth and not inflation. That is a bit of a new twist this time around since inflation has not been this hot in 40 years.

Putin continues to conduct military exercises on the western boarder and 130,000 troops have been deployed. European markets were down 2% overnight and Asia also had big losses. In general, wars only have a temporary impact on stock prices.

Swing traders should have sold the SPY position on Friday per the stop instructions (close below the 200-day MA). We were able to exit for a gain and we will wait before we re-enter. If you are selling bullish put spreads on basic materials stocks, they should be holding hold up fairly well since those companies will be able to raise prices. They are fairly insulated from inflation and Asset Managers are “parking” money in this sector. I would avoid selling additional bullish put spreads until the Fed meeting. The projections for Fed tightening are rising rapidly and that will keep buyers at bay.

Day traders should favor the downside early. Global markets have been weak and there will be “Fed speak” today. After the drop Friday and the close below the 200-day MA, the market will not stage a meaningful rally until the downside has been tested. 1OP will start the day in a bullish cycle and I want to see if the early gap down can find some traction. The S&P 500 was in positive territory briefly this morning so we could see a quick bounce. If the SPY can’t fill the gap during the bullish cycle, the next bearish cycle will push us lower. I am more bearish than bullish this morning. No need to rush into trades near the open. We have seen big intraday moves. Be patient – you will have your windows of opportunity.

Support is at SPY $430 MA and resistance is at the 200-day MA.