SELL The 1st RATE CUT Explained

Introduction

In this tutorial, we will explore the implications of recent rate cuts across the globe and how they affect the stock market. Understanding the historical context of rate cuts, including types of cuts and market reactions, will help you make informed trading decisions. This guide will break down the complex themes discussed in the video by Trading Fraternity, focusing on the concept of "selling the first rate cut."

Step 1: Understand the Types of Rate Cuts

Familiarize yourself with the three main types of rate cuts:

1. Soft Landing Cuts

   • Occur when the economy is stabilizing, and the Fed lowers rates to normalize conditions.
   • Historically results in a market uptick (e.g., S&P 500 increases by about 10% six months post-cut).

2. Hard Landing Cuts

   • Implemented when the economy is deteriorating, necessitating stimulus to promote growth.
   • Often leads to negative market performance (e.g., S&P 500 declines by about 6% three months post-cut).

3. Panic Cuts

   • Emergency cuts in response to a financial crisis or market crash.
   • Historically, these have resulted in market rebounds (e.g., S&P 500 averages a 20% increase six months after a panic cut).

Step 2: Analyze Recent Market Data

Monitor key economic indicators that influence rate cut expectations:

• ISM Manufacturing and Non-Farm Payrolls

  • Pay attention to the correlation between these indicators. A decline in ISM Manufacturing often forecasts job market weakness.

• Market Reaction to Economic Reports

  • Assess how recent data releases, like the jobs report, have shifted market sentiment regarding rate cuts.

Step 3: Evaluate Historical Context

Review the past 12 rate cuts since 1970 to identify patterns:

• Track the market's response to each type of rate cut and the accompanying economic conditions.
• Note that the current environment shows a unique situation where risk assets have significantly outperformed leading into the first rate cut.

Step 4: Formulate Your Trading Strategy

Based on your understanding of rate cuts and recent market movements:

1. Be Cautious of the "Sell the First Cut" Narrative

   • Consider the implications of selling positions after the first rate cut, especially if data trends indicate a shift towards a hard landing.

2. Make Informed Trades on Bonds and Stocks

   • Look for opportunities in bond markets (e.g., TLT stock) as yield curves steepen or flatten in response to economic data.
   • Monitor stocks like Apple and Disney for potential volatility tied to earnings releases and market sentiment.

Step 5: Stay Updated on Economic Releases

Keep track of the following upcoming economic data and Fed speeches:

• ISM Services and Employment Reports
• Fed Speaker Commentary
  • Anticipate how these releases can influence market sentiment and trading strategies.

Conclusion

Understanding the dynamics of rate cuts and their historical implications can significantly enhance your trading approach. By analyzing data, evaluating past market reactions, and remaining vigilant about upcoming economic indicators, you can better navigate the stock market's volatility. Keep refining your strategy based on new information, and remember to monitor how the broader economic context influences your trades. Stay informed and prepared for potential market fluctuations as the narrative around rate cuts evolves.