Today the Federal Reserve approved its first interest rate hike in more than three years. It also indicated an aggressive path ahead with six more hikes scheduled through the rest of the year. The broad stock market started to plunge around 2:00 PM when this hawkish announcement was made, but equities snapped back and recovered by the end of the day after Fed Chairman Powell gave a press conference and mentioned that despite the proposed hikes, he would be flexible in his decision to carry them out depending on changing economic data. Today's rate hike was expected by investors, traders, and analysts as rhetoric from the Fed has been quite hawkish since January. The recent downturn in the broad stock market may have already factored in these hawkish fears, so this market may be ready to rally again, at least in the short-term.
The cycle labeling of our three broad stock market indices (DOW, S&P 500, NASDAQ) is still a bit ambiguous, but it should become more clear over the next few weeks. In all three indices, we could be seeing either the end of an older medium-term cycle and a final bottom happening now (in our current reversal zone this week or next), or we could be only a few weeks into a new medium-term cycle that started off the lows of Feb. 24. (There is also the possibility that the DOW and/or S&P 500 started a new medium-term cycle off their lows from Jan. 24. This is considered unlikely; but if true, it would make this market VERY bearish with much deeper lows ahead.)
This week on Monday the NASDAQ tested its Feb. 24 low and went slightly below it before snapping back up, The DOW and S&P 500 stayed above their Feb. 24 lows for a case of intermarket bullish divergence in our current reversal zone (March 14 - 24). A strong rally continued from those lows today despite hawkish news from the Fed. This is making a strong case for bullish new (young) medium-term cycles rather than older cycles still falling to their bottoms. We shall see this week and next if the bullish case is true. There is still time for lower bottoms to form in this reversal zone (which ends next week on Thursday). Even if that happens, a new rally would begin from there, so it was probably a good idea to take profits and unload our short positions today - which we did. We are now on the sidelines of the broad stock market.
If we are starting new medium-term cycles now, we don't expect those cycles to make new all-time highs. If they do, we may be able to avert a major crash in the broad stock market. The next few months will be a critical time for equity markets. The Russia/Ukraine war could be the pin that breaks the stock market "bubble", but if this conflict resolves itself quickly, it could be the trigger for a very strong rally that might propel equities out of a major crash. We shall see.