Aside from a flurry of activity shortly after Tuesday's regular session open, there wasn't much to get excited about in the index ETFs. The SPDR S&P 500 ETF (SPY) and Invesco QQQ Trust (QQQ) finished slightly in the red while the iShares Russell 2000 ETF (IWM) closed just above the flat line. The only conclusion I draw from Tuesday's trading is that prices near Monday's lows are being accepted as fair value, which means another lower test is likely on the way.
Several traders pinged me on Tuesday asking what changed between last week and this week to account for the shift in sentiment, and I think we all know the answer.
Immediately following the Aug. 10 release of the lower-than-expected July Consumer Price Index (CPI) numbers, investors began to believe some of the crazy talk flowing from the experts on CNBC and other media outlets that the dip in inflation would likely lead to a course reversal at the Federal Reserve. The idea of a reversal in course didn't make sense then, and I'm still confused by it. Heck, back in mid-July Richmond Federal Reserve President Tom Barkin said the following to an audience at the Rotary Club in Charlotte:
"One of the things that those who studied the 1970s would say is what you shouldn't do is restrict, stimulate, restrict, stimulate, restrict, stimulate. Every time you had a weak month in the 1970s, somebody stimulated again. That is probably not the right policy."
As much as we're all accustomed to taking our guidance from Fed Chair Jerome Powell, if you're trying to get a feel for where the Federal Open Market Committee (FOMC) stands, it's worth paying attention to every person who has a voice. And while Barkin isn't a voting member this year (he's an alternate in 2023 and a voting member in 2024), he's still worth listening to if you're trying to form an opinion.
It's more important than ever to understand your investment time horizon. As a day trader or scalper, you have the luxury of ignoring most of what the Fed is doing and simply cueing off things as simple as a session's volume-weighted average price (VWAP). But if you're an investor or position trader, the mantra of don't fight the fed should sound alarm bells in your head.
The Fed may soon reduce the size of its rate hikes, but if you want to align yourself with the direction that Powell and his Fed colleagues are taking, do you think it makes sense to be rolling the dice on them reversing course before they've signaled their intent to do so? I don't.
I wrote on Tuesday about focusing on the VWAP anchored to the mid-June swing low and the 50-day simple moving average for new swing trades on the SPY (currently around $396), and that's still the approach I favor. While day traders and scalpers should be willing to trade long when buyers are active above the session's VWAP, swing and position traders should wait for a bullish reversal and confirmation from an area they can easily measure their risk against.