2 Areas of Wall Street to Avoid This Fed Week

Subscribers to The Contrarian Edge received this commentary on Saturday, September 12

As of this writing, there’s an 87% chance the Fed hikes interest rates by 25 basis points next Wednesday. That number sat at 70% on Thursday.

A month ago, those odds sat at 52.2%. A week ago, they were 49%. That’s what back-to-back, hotter-than-expected PPI, CPI readings will do to markets. Next week around this time, we’ll likely to have our first interest rate hike since 2023.

Schaeffer’s Senior Quantitative Analyst Rocky White got the ball rolling last week with the S&P 500’s quantitative history during Fed weeks. Rocky’s main takeaway was that stocks tend to struggle in the weeks after rate hikes, but less so when there’s already some pessimism baked into market sentiment. Investors don’t like the surprise, and if they’re already tensing up for a hike, there’s less shock.

Beyond the S&P 500, there are two other areas we want to double-click on to assess their short-term viability heading into such a pivotal week.

Tech a Ticking Time Bomb?

The first is obvious. Let’s see if tech names -- the types of stocks that historically don’t benefit from rate hikes -- really do underperform more than the rest of Wall Street.

Per White, Fed decisions result in slight Nasdaq-100 (NDX) underperformance one and two weeks later, then it smooths out over the one- and three-month timeframes. Ironically enough, the day of the Fed meeting outperforms anytime returns. The real trouble emerges when the Fed hikes rates, though.

That is some serious underperformance, not just across “anytime” returns, but also with Fed week returns in general.

It puts the Invesco QQQ (QQQ) – the ETF that tracks the NDX – in particular focus. The $700 level has been a floor since August, while there are hints of a double top at $740 and $720. The 100-day moving average held this week and has only been breached once on a closing basis since April 10. Beneath that, a trendline connecting March 30 lows at $555.60 to the summer doldrums at $660 is another technical layer that could step up.

While QQQ has some technical support in place, options traders are positioning themselves for trouble. The top six QQQ open interest positions are all puts, with the December 660 strike the most popular. The tech ETF is also staring down some serious seasonality and macro headwinds. Per White, QQQ averages a 1.8% loss in September over the last 10 years, with a 40% monthly win rate. Factor in the midterm election volatility looming and two more Fed meetings – one in December where another rate hike is on the table – and the tech correction could be unfolding before our very eyes.

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