Are More Rate Hikes Bullish?
The Federal Reserve (Fed) has signaled two more rate hikes this year, surprising those in the market who had been expecting a pause. Despite this, market reaction has been relatively subdued, with indices like the NASDAQ and the S&P 500 seeing minimal impact. Interestingly, certain stocks, such as Nvidia, have seen a rally following the announcement, contrary to expectations that higher interest rates would dampen these growth-oriented stocks. Nvidia's volume has remained robust, indicating continued buying interest.
This dynamic is explained not just by investors buying stocks to hold, but also by market making firms and proprietary trading firms purchasing stocks to hedge their positions. This becomes especially apparent when these firms sell call options to retail investors, as they are required to buy the underlying stock to counterbalance the negative Delta resulting from the sale of calls.
However, it's important to note that this trend may not be sustainable, and the market can move in both directions due to this dynamic. The forces that are currently driving stocks higher could just as easily push them lower.
Analyzing the SPX (S&P 500 Index), it's observed that it's trading at the upper edge of the expected move. This presents a precarious situation. A slight move outside of this expected range could provoke buying from those who are short gamma, resulting in a significant market upswing. Nonetheless, the higher likelihood is for the market to return back into the expected move.
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