Daily Plan 7.26.23
Rate Decision + FOMC
Good morning readers!
What an incredible session we had yesterday, with both indices coming tantalizingly close to hitting their targets. Neither of them budged below the designated levels before establishing the LOD (Low of the Day) and then making a powerful surge higher for the remainder of the session. This kind of price action is precisely what one should expect when dealing with a trending market. Unless the indices unexpectedly break below a trend pivot, I will continue to provide newsletters focused on capitalizing on these upward moves.
Yesterday, both Microsoft and Google reported their earnings. Unfortunately, MSFT turned out to be a dud, but GOOGL is on track to rise over 200%. Thankfully, GOOGL's gains more than cover the cost of MSFT, as long as you manage your risk effectively and trade with equal position sizes during earnings. It is crucial to maintain consistent position sizes unless you are increasing your exposure in line with the trend, a strategy known as averaging up on a winner.
Apart from earnings reports, Nvidia, Advanced Micro Devices, Meta, and Apple all demonstrated strength above their respective levels yesterday. My primary focus on a day-to-day basis is to go with the flow of the market, whether it's upward or downward. It's important to note that volatility has significantly subsided, leaving many investors feeling squeezed for months now. The VIX remains at the 14 handles, and there seems to be no sign of hope for the doom and gloomers who were anticipating a market downturn.
Today we have FOMC as most of you already know, but for ones who may not, let me give a short briefing on what to expect.
Interest Rate Decision: The most anticipated aspect of an FOMC day is the announcement of the federal funds rate, which is the interest rate at which depository institutions lend reserve balances to other depository institutions overnight. Any changes to this rate can have a significant impact on various financial assets, including stocks.
Forward Guidance: Along with the interest rate decision, investors and market participants closely follow the Federal Reserve's statements on future monetary policy, known as forward guidance. Hints or indications about future interest rate changes, inflation targets, or economic outlooks can influence market sentiment.
Press Conference: Following the interest rate decision, the Federal Reserve Chairman typically holds a press conference. During this event, the Chairman explains the committee's decisions and provides additional insights into their economic projections and policy considerations. Market participants pay close attention to the Chairman's remarks for any clues about the central bank's future actions.
Economic Projections: Along with the press conference, the Federal Reserve releases its economic projections, including GDP growth, unemployment rate, and inflation forecasts. These projections can provide further context for the committee's policy decisions and influence market expectations.
Market Volatility: FOMC days are often associated with increased market volatility, especially during the periods when interest rates are expected to change or when the Federal Reserve's statements deviate from market expectations.
Sector and Asset Performance: Different sectors and assets can react differently to FOMC decisions. For example, rate-sensitive sectors like financials and real estate may be particularly affected by interest rate changes, while high-growth technology stocks might be sensitive to changes in future economic projections.
Global Impact: The decisions made by the Federal Reserve can have spillover effects on global markets. Investors around the world closely monitor FOMC days as the U.S. Federal Reserve is a key player in the global financial system.
Apart from the FOMC (Federal Open Market Committee), I discussed my expectations for this meeting in detail in Flow State #36.
Be sure to check it out, and I'll also be sharing my thoughts on Twitter throughout the session. On any day with a significant event, my objective is to position myself ahead of the event with either a long or short trade, but the key is to have a cushion. This means that the trade is already working in your favor, and you have already secured some profits. It's essential to consider your risk tolerance when determining your trade size. My position size might differ from yours, as I can withstand more pain from experience than a newer trader. Always maintain a position size that allows you to remain unbiased, regardless of the money at stake. This will prevent catastrophic events that could negatively impact your portfolio in the long run.