How I See This Scene Playing Out

Bulls are getting some much-needed relief this morning in the way of a bounce in front of the FOMC tomorrow afternoon. Although the QQQ ETF for the Nasdaq initially faded off $322 at the open, bulls stepped right back in to push us above the opening highs. I view the $323 area just above as being a bit significant and am looking to see if the buying power is there to overtake it. 

That said, it is tough for me to get too excited about virtually any pre-FOMC action, especially the first FOMC in years where The Fed is expected to actually raise rates and signal official "liftoff" into a new monetary regime. While we all have our theories as to how the market will react, the reality is that we must accept as speculators that anything goes in this spot, and we ought to be ready to adjust accordingly. 

Of course, I do have an opinion. And I figured today would be as good as any to share it before the event, since I am sure most will be ready to do so, as usual, after the fact. 

Jay Powell has a background in the credit markets. And he clearly has been seeing what HYG and JNK have been doing. That, alone, could compel him to only raise by twenty-five basis points in lieu fifty. And he did signal as much a week or two ago on The Hill for his testimony. Should The Fed raise only by twenty-five basis points, it will be cheered initially as dovish. And that may be seen as bullish...initially.

But I have to believe that markets will then quickly recalibrate the baby rate hike as being unsuitable for the type of inflation we are suffering. The market will then realize just how far behind the curve Powell is, and respond in kind. Gold, below on its monthly chart, could easily benefit from a baby rate hike and probably should. The monthly GLD candle is featuring a fade at a major breakout level. However, we have two and a half weeks left before the candle completes itself, and I suspect it will look much differently than it does now come April.

The inverse holds true, however, for a fifty basis point hike. And this may sound contrarian, but I think the market would initially sell the news but then quickly recover as it realizes The Fed is at least on the right track. If Powell does hike by fifty basis points I would likely cover shorts into any initial post-FOMC weakness and tread with a gold long more carefully.