Tuesday started great, but the opening bell rang and stocks sank like a rock. Many traders attributed Tuesday's pre-market strength to rumors that Chinese officials were examining scenarios to end its zero-Covid policy. The potential for such a pivot in Chinese policy sent shares of stocks such as Alibaba Group Holding (BABA) , Baidu Inc. (BIDU) and JD.com (JD) soaring. Still, the buying petered out after a Chinese official denied the market's speculation.
I don't know if there's a kernel of truth to the zero-Covid policy rumor. But I know this much: I won't be betting too heavily on anything that relies on rational decision-making by the Chinese government.
Moving on to today's headline event -- namely, the Federal Open Market Committee's (FOMC) decision on interest rates -- I don't think a trader alive isn't expecting fireworks this afternoon. Thanks to the CME FedWatch Tool, we know the market has priced an 87% probability that the Fed will raise rates by 75 basis points here on Wednesday. It's safe to say that no one will buy or sell based solely on today's rate hike. However, if we're to believe the experts on TV and in the financial media, the stock market will go bananas based on what Fed Chairman Jay Powell tells us during his news conference.
Here's what seems to be the consensus: If Powell hints toward a less aggressive action in December and a pause in hikes in 2023, expectations are that stocks will soar. On the flip side, if he remains cautious and concerned about inflation and suggests the pace of hikes will stay as they've been, stocks will sink. Frankly, I'm not sure what Powell will do.
The one thing I am looking at, however, is how small-caps and Dow Jones Industrial Average (DJIA) stocks have performed over the past two-plus weeks. While I'm not long or short small-caps or the DJIA, I'd be wary about chasing strength in the iShares Russell 2000 ETF (IWM) and SPDR Dow Jones Industrial Average ETF (DIA) , with both ETFs trading in and around their 200-day simple moving averages (SMAs).
If you're trading the Invesco QQQ Trust (QQQ) off of today's Fed decision, my rock-bottom level to bid QQQ is $268. Below that level, I think the ETF sinks to new swing lows. And if you're looking for the volume-weighted average price (VWAP) anchored to the Oct. 13 swing low to trade off of, it's currently sitting around $272.25. A rally and close above $284.50-$286 likely triggers a decisive bout of fear of missing out (FOMO) and puts the QQQ on track for a test of its 200-day SMA near $313.50.
