In this article:

• Fed looks to reduce its balance sheet
• Energy, utilities show strength, but is it enough?
• Cascading effect could set off lower moves

It’s a dodgy market so far this week.

Following the Labor Day Holiday break, the market has been up and down to open the short week.

Newsworthy events are likely to affect trading this week from Russian shutting off energy access to multiple Federal Reserve speeches.

Traders are urged to stay updated on all the events and how the market is responding.

Stock market sets up for collective move lower

This bearish market doesn’t appear to want to let go of its bite and allow a rally into the fall.

This holiday-shortened week may have plenty of volatility to keep traders on their toes.

Collectively the stock market seems bent on shifting toward lows from last week. There is little variation in movement among the three major indexes. Few sectors, such as energy and utilities, are looking positive while the rest are leaning to the downside.

Simpler’s traders don’t see energy and utilities as strong enough alone to lead and drive the markets. This lends to the argument that the stock market is looking at lower tallies through the week.

Bullish internal market signals have not shown anything meaningful that could force a switch in negative market movement without a clear catalyst changing the course.

There are various news events for traders to watch for any sudden changes that could affect the market. These include central bank announcements and others:

• Wednesday – Bank of Canada Rate Statement.
• Thursday – European Monetary Statement; Federal Reserve (Fed) Chairman Jerome Powell speech.
• Friday – Canada employment numbers.

Several Federal Open Market Committee (FOMC) members also speak this week on Wednesday and Friday. If anything comes out like last week when Cleveland Federal Reserve President Loretta J. Mester said the Fed has much work to do indefinitely to fight high inflation, the market could take to heart any more harsh words.

“Central banks have delighted in punching down markets lately so we mustn’t expect any kind of dovish talk soon that will reverse that,” said Sam Shames, Vice President of Options at Simpler Trading. 

Fed balance sheet reduction ahead

Fed actions ahead could cause a cascading negative effect in the economy and stock market.

Sam pointed to expected September moves from the Fed for balance sheet reduction, i.e. selling such assets as U.S. Treasury bonds and mortgage-backed securities.

“The market is unlikely to want any of these, so the prices must fall to levels where buyers will step back in,” Sam said.

“The effect that balance sheet reduction will have most immediately is a rise in interest

rates and mortgage rates,” Sam stated. “As the Fed sells off these assets the prices will drop and inversely the yields will rise.”

The cascading effect comes as yields rise that likely puts pressure on big tech, then pressure on big tech will pressure the Nasdaq and S&P 500, and this then could pressure everything else.

A continuing trading plan that Simpler’s team is implementing is directional day trading with the market – up or down – and watching the chop for signs of a breakout move.

Simpler’s traders continue reviewing the S&P 500 (SPY) as the leader in signals for how the market might move next. Structure, momentum, and levels are the focus, particularly action related to the 200-day simple moving average on the SPY.

“All signals imply to treat this like a bear market and look to sell all rallies back to falling daily resistance levels,” said Sam, who urged caution with volatility ahead.

Look to day trading as an option

In all the chaos of this market and the stress it creates, one strategy to consider is day trading.

The team at Simpler Trading understands what traders go through when the market maintains an extended level of uncertainty.

Our day traders “get in, get out” with trades that limit capital exposure and deliver live-trading insights during market sessions.
Why not check out this daily training and learning option?