All Eyes on the Fed

Stocks Fundamental Forecast: Neutral

Dow Jones, S&P 500 and Nasdaq 100 futures wrap up a strong weekInflation data has traders eyeing the Fed and its balance sheet nextQuadruple Witching Day is Friday, Dow retail positioning bets eyed

This past week, futures tracking the Dow Jones, S&P 500 and Nasdaq 100 closed +3.74%, 3.55% and 3.72% respectively. This meant the best weekly performance since earlier this year, reversing losses accumulated since late November as Omicron Covid-19 variant woes faded. An in-line CPI report, which showed inflation around a 40-year high, did little to further boost hawkish Federal Reserve policy bets.

With the inflation report now behind us, equities are turning their attention towards the last Federal Reserve monetary policy announcement of the year. Policymakers are not expected to change the Federal Funds Rate, but that’s not what traders will be tuning in for. With general price growth around a 40-year high, expectations have been rising that the central bank could speed up tapering asset purchases.

In fact earlier this month, Chair Jerome Powell noted about how they will retire the term ‘transitory’ from explaining inflation. A strong labor market, with jobless claims at a 1969 low, and rising economic growth projections, via the Atlanta Fed GDPNow, bodes well. However, recent episodes of a slowing balance sheet have been associated with near-term pullbacks in the stock market – see below.

Still, the central bank will likely continue to hold a cautious view, especially amid the Omicron Covid-19 variant. As 2022 wraps up, investors will likely continue positioning themselves for the road ahead. A more hawkish Fed is becoming an increasing reality. All else being equal, the Fed raising benchmark lending rates, coupled with a reduction in government bond purchases, tends to bode ill for risk assets.

Friday is ‘Quadruple Witching Day’. That is the simultaneous expiration of stock index futures, single stock futures, stock index options and stock options. This tends to increase trading volumes and possibly volatility as investors offset existing trades that are profitable. Historically speaking, stock markets tend to be rather quiet. But, exhausted demand for equities in the weeks after could bode ill for sentiment.

Watch the Balance Sheet

sp500 vs fed balance

Dow Jones Retail Positioning Outlook

Taking a look at IG Client Sentiment, which shows retail trader positioning in markets, investors are about 39% net-long the Dow Jones. Since most traders are short, this suggests prices may continue rising. Downside exposure has increased recently over a daily and weekly basis. The combination of overall positioning and recent shifts in exposure is offering a stronger bullish contrarian bias.

igcs, us30, wall street, dow jones

*IG Client Sentiment Charts and Positioning Data Used from December 10th Report

— Written by Daniel Dubrovsky, Strategist for

To contact Daniel, use the comments section below or @ddubrovskyFX on Twitter

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