The Yoyo Game

“Regagner la Confiance des Investisseurs”, or in other words, regain the trust of the investors.


This is what Jerome Powell should have done yesterday in the press conference. However, what he did is the complete opposite. The main focus yesterday was on 2 major things. The federal rate decision and the monetary policy approach during the press conference.


The Federal rate remained as is, ranging between 0% and 0.25%, leading to minor gains in the major U.S. indices from the big drops that occurred over the past 2 weeks. However, during the press conference, governor Jerome Powell addressed the markets with somewhat mixed signals and a neutral bias towards the tools needed to fight inflation.


In other words, we heard some conflicting sentences which showed uncertainty and increased anxiety in the market, leading to further drops in the indices. We also witnessed a strong bullish momentum on the dollar with the potential interest rate hikes in March, consequently affecting gold and leading to some losses.


The recent reactions in the market are mainly determined by the behavior of the investors, which is mostly driven by emotions. In order to try and have a clearer vision of the effects of the news on the market, and in specific the S&P 500, let us check the CBOE Market Volatility Index (VIX).


VIX (Figure 1) already broke above its 30 psychological level earlier this week, and with the uncertainty stemming from the press conference yesterday, it was able to reach 32. This alone shows how much the investors are anxious and how much they are fearing the market from a potential panic selling.



Figure 1 : Source:  TradingView  ( VIX and S and P 500 )


On the other hand, the S&P 500 sentiment history (Figure 2) shows that it is currently at its lowest value since the beginning of the year. Historically, when values as such are reached, we usually witness recoveries. However, this might not be the case because inflation is still the greatest threat to the U.S Economy.



Figure 2 Source: Trading Central Buzz (S and P 500 Sentiment History)


Inflation and interest rates will be the main topic for at least the first quarter of 2022. As it is being translated in the markets, the trust in the federal reserve is shaky. So, will the federal reserve try to gain the trust back from the investors? The more important question is, will they be transparent with the real issues and effects the economy is facing?


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The content published above has been prepared by CFI for informational purposes only and should not be considered as investment advice.  Any view expressed does not constitute a personal recommendation or solicitation to buy or sell.  The information provided does not have regard to the specific investment objectives, financial situation, and needs of any specific person who may receive it, and is not held out as independent investment research and may have been acted upon by persons connected with CFI.  Market data is derived from independent sources believed to be reliable, however, CFI makes no guarantee of its accuracy or completeness, and accepts no responsibility for any consequence of its use by recipients.