Trading strategies for after the big Fed decision: Finding stocks overdue for a relief bounce

Published Wed, May 4 202211:40 AM EDTUpdated Wed, May 4 20225:22 PM EDT

Patti Domm @in/patti-domm-9224884/@pattidomm

The Federal Reserve is expected to raise interest rates by a half percentage point Wednesday afternoon, but what the central bank indicates about its future actions will be the key to post-Fed trading. Market pros will be most engaged when Fed Chair Jerome Powell speaks after the 2 p.m. ET statement. If he does not push a more aggressive hiking agenda, the market may perceive him as dovish and there could be a relief rally. But should Powell lean heavily on how the Fed could more aggressively use its main artillery of higher rates to battle inflation, the risk is that he will sound hawkish. That could trigger a sell-off in stocks, though some strategists say that may help the market find a bottom. "In many ways, I feel how can the Fed not be dovish? Our assumptions for the Fed are that they are going to sound hawkish. It's hard to see the Fed out-hawking market expectations," said Sam Stovall, chief market strategist at CFRA. Stocks have been whacked as investors worry about the worst outcome from the Fed's rate hiking. The S & P 500 declined 8.8% in April, its worst month since the pandemic crushed the economy in March 2020. The S & P 500 is up about a half-percent so far in May. Stovall said a game plan for post-meeting Fed investing could be to take a look at both the stocks that are most oversold and also most overbought. Oversold names should bounce if the Fed is viewed as dovish and overbought names could be faded. "It's not just that they have lagged the market. It's how they've done relative to themselves," he said of the oversold names. Stovall said groups that are more than two standard deviations below their 200-day moving average are a good place to look. The major sectors that fit that category are consumer discretionary, financials, communications services and tech. Those sectors are all represented by major ETFs. For example, the consumer discretionary sector trades in Consumer Discretionary Select Sector SPDR Fund . The XLF is Financials Select Sector SPDR Fund , the communications sector is represented by Communications Services Select Sector SPDR Fund , and technology is XLK, the Technology Select Sector SPDR Fund. Stovall said S & P subsectors in that category include applications software. Stocks in that group that CFRA rates as strong buys include Autodesk, Cadence Design, Salesforce and Synopsys. It rates Adobe and Intuit as buys. Stovall said the movies and entertainment subsector, which includes Walt Disney and Live Nation Entertainment , is also on the list. Within consumer discretionary stocks, there are subsectors of apparel, auto parts, footwear and home building that are all lagging. Within the apparel and accessories subsector, CFRA rates VF Corp a strong buy and Ralph Lauren and Tapestry as buys. CFRA rates DR Horton and Lennar as strong buys in home building, and Pultegroup is a buy. "If the Fed is less hawkish then we could see the yield curve steepen which would benefit banks. If the Fed is less hawkish, that would benefit the S & P growth group in general, with discretionary, communication services and tech in particular," he said. Stock groups that might see some profit-taking after a dovish Fed include consumer staples, utilities and energy. "Not surprisingly, energy is two standard deviations above its mean, whereas utilities and consumer staples are actually within one standard deviation," he said. But if the Fed sounds hawkish, Stovall sees more trouble ahead for stocks. "If they're more hawkish than the street is anticipating, it's more of the same," he said. "The winners and losers will not switch positions."

Traders on the floor of the NYSE, April 14, 2022.

Source: NYSE