Fed Impact Already Here

For months, traders have been worrying about what will happen if and when the Federal Reserve raises interest rates. This psychological factor has already manifested into trading habits, so in effect, the impact of a rate hike has already been partially felt. Traders and investors alike have been far more cautious than usual, driving down prices intermittently. This was exactly the impact that a rate hike was expected to have, and as such, when the rate hike is announced, the damage should–theoretically–not be nearly as bad as it was originally expected to be.

The Fed is expected to raise interest rates sometime next week. This is not a definite occurrence yet, only a highly probable event. The good news is that much of the damage that will be done to short term asset prices has already been done. Those that like to focus on long positions will not need to wait long before healthy assets climb up in value. And those that are able to successfully trade on the short side of things, such as binary options traders and day traders, there is the same amount of opportunity as before–just with an end in sight to the high rates of variance that we’ve currently been seeing.

Think about all of the good news that the market has seen over the past several weeks. Even with all of this, the S&P 500 has dropped about 15 points over the last month. That’s a little bit less than 1 percent, and if you look at the highest price during that timeframe, it ends up being more than 1 percent. The S&P is currently considered to be the best general pulse of what is going on with the U.S. economy, and the fact that great news reports, major companies announcing better than expected earnings, and so on, the fact that a significant drop like this points to the fact that people are scared to put money into the market.

Everyone knows the old adage, “buy low, sell high.” But what that actually translates into is that the current low prices that we are seeing, and might still see for a few more weeks, are a good time to buy. Price have been artificially lowered because of the Fed and the speculation surrounding their pending announcement. Furthermore, many major stocks, even those that are popular in the public’s eye, are owned mostly by institutional investors. For example, Apple, one of the most ubiquitous names in technology, has an institutional ownership rate of 59 percent. When a major investment firm or hedge fund wants to unload a good product right after good news and before bad news occurs, such as the current gap in between the latest jobs report and the expected rate announcement, a drop in prices is better understood. This becomes even more pronounced because many traders do not want to have the expected drops in prices stuck on their end of year reports. It makes far more sense to unload the stocks when they are up, report to their investors a profitable year, and then buy shares again when they are lower. And when a company has 59 percent or more of its available shares held by huge companies, an even bigger impact is felt.

As short term traders, these concepts create rough guidelines for us to formulate a strategy, after which we can fill in the details. But this big picture illustration of what is currently occurring in the business world–and looking at the reasoning why these things are happening like they are–helps us create a better impression of the group psychology that is currently going on in the trading world, and it helps us be better able to predict future occurrences.