Today's Trading Plan (April 19, 2023)

Brit Ryle

Posted April 19, 2023

A group of french economists have determined that Fed statements regarding its latest interest rate moves can now be understood by the average high school senior, whereas just 3 years ago, a person needed to be closing in on a college degree to squeeze some kind of meaning out of the Fed’s verbal contortions.

Well whoopty-freakin’-do…

Aside from the fact that we’ve got economists studying the clarity of Fed statements when anybody could just plug the text into the Flesch-Kincaid Readability test and get a worthy result, I’m not really sure how helpful this is…

Fed statements are designed to manipulate the market. Because, while absolute levels of interest rates affect the economy (making loans more expensive for consumers and businesses alike and thereby influencing spending behavior), expectations about what the Fed may or may not do next are every bit as important. 

Like, if the Fed says “that’s it, we’re done hiking rates,” the market’s reaction will be a lot different than if the Fed says “we have more work to do.” 

And it doesn’t matter how easy it is to understand the words themselves. In fact, it’s probably easier to manipulate the market with simple language than the kind of mush-mouth statements Greenspan used to put out. 

I know my own bullshit detector kicks into high gear when somebody starts throwing out a bunch of big words to explain what they mean.

Plus, today’s Fed PR machine is not a one-man show like it was at the Greenspan Fed. Greenspan was a mealy-mouthed master. He could spew enough contradictory statements all by himself, there was no need for his underlings to muddy the water. 

But today, every Fed governor regularly spouts off deeply conflicting projections about what the Fed will do next.

Last week, the president at the Chicago Fed said “At moments like this of financial stress, the right monetary approach calls for prudence and patience.” And then the president of the Philadelphia Fed said “I’m in the camp of getting up above 5 and then sitting there for a while…”

The market took these statements to mean that we should expect a 25 basis point hike in May and then the Fed would pause, with rates in the 5%-5.25% range…

Of course, the market rallied on this “news.” 

So this week, we’ve got the St. Louis Fed president (among others) calling for 3 more hikes, to the 5.5%-5.75% range. And guess what – stocks are lower today.

I guess clear statements that clearly contradict each other really don’t offer much clarity…

Divide and Conquer

The Fed is trying to keep the market on its toes. Chair Powell & Co know they can’t push rates much higher or the banking sector (and probably the commercial real estate sector) actually will implode. So they’re just trying to keep a little uncertainty in the air so stock prices don’t explode higher and maybe take inflation readings with it. 

Now, earnings season just got underway, all the major banks have reported good numbers. And even a couple regional banks have done OK. 

And there’s one in particular that looks ripe for an upside trade: THE Charles Schwab Corporation (NASDAQ: SCHW). 

A month ago, investors thought THE Charles Schwab Corporation might be the next banking domino to fall. Shares were crushed from $75 down to $50. But its earnings report Monday makes that +30% drop look a little overdone.

On a year over year basis, revenue was up 10%, net profit was up 14%, new assets rose 25% and THE Charles Schwab Corporation hiked its dividend by 25%. 

Not…too…shabby – for a bank that was sposta be in big trouble. 

Shares have recovered to the ~$55-$56 range. And the stock’s got a pretty clear path to $60 over the next few days, with an outside shot at the 50-day moving average which sits up at $64.65. 

Soooo, buy shares of THE Charles Schwab Corporation (NASDAQ: SCHW) for a quick 10%-12%. 

Or, buy the April 58 strike SCHW call options that expire next week (April 28) around  $0.50. 

That’s it for me today, take care and I’ll talk to you on Friday…

Briton Ryle

Chief Investment Strategist

Pro Trader Today