Jerome Powell had one message he wanted everyone to hear loud and clear: The Federal Reserve isn’t done raising interest rates.

At the Fed chair’s last press conference on June 14, Powell described the upcoming July Federal Open Markets Committee (FOMC) meeting as “live.”

Fed officials often use “live” to suggest a rate increase is more likely than not at its next meeting.

This came after Powell said the Fed was “skipping” a rate hike during its June meeting, which implies a continuation is coming.

Powell then kicked that messaging up a notch during his semiannual testimony to Congress on June 21. He played down the significance of the June pause and set the expectation for two more rate hikes this year.

When referring to the Fed’s updated dot plot – which shows FOMC participants expect more rate hikes – Powell said:

I think that’s a pretty good guess of what will happen if the economy performs as expected.

Investors received the message. Powell’s comments spooked the stock market.

Over the past two weeks, bond traders have fully priced in another two interest rate hikes… and pushed out expectations for when those rate hikes are coming.

That sent U.S. Treasury yields at the short end of the yield curve surging. The 2-year Treasury yield rose to 4.8% last week, knocking on the door of its 52-week high of 5% set right before the banking crisis.

That means the market is now expecting rates to stay high for longer than what was previously priced in.

The S&P 500 closed last week down 1%, ending a 5-week win streak – its longest since November 2021.

Despite the recent volatility, we believe the market is set for a short-term “melt-up” in the future.

Today, I’ll tell you why we could see a rally begin as early as in July – plus reveal another surprise announcement the Fed could be cooking up next month.

How to Play a Melt Up

In my last Daily, I said the market could be on the verge of a “melt-up” phase.

A melt-up is when the market suddenly explodes higher – and FOMO (fear of missing out) starts to rear its ugly head. So while we remain cautious, we realize there is still money to be made in this market.

Despite Powell’s threat of more rate hikes, we continue to see a promising set-up for a move higher. This set-up includes improving corporate earnings… discounted valuations… and bullish investor sentiment.

Since we wrote about them on June 14, those metrics haven’t changed.

Corporate earnings expectations continue to rise. Wall Street is now penciling in a $230 earnings per share (EPS) over the next 12 months – a $1 rise from the $229 EPS we cited in our last issue.

Valuations remain attractive. The equal-weighted S&P 500 Index is trading at a forward price-to-earnings of 15.3x. That’s a 10% discount from its long-term average of 17.1x.

Plus, Bank of America’s recent survey of stock and fund managers found a net 25% of them are underweight U.S. stocks. That means significantly more fund managers are underweight U.S. stocks than either overweight or neutral.

While that’s an improvement over the net 39% underweight in May, it still represents a significant amount of buying power that has sat on the sidelines. If that money sitting on the sidelines suddenly comes back into the market, we could see a short-term rally.

Now, it’s anyone’s guess what the market will decide to do based on Powell’s statements… So we won’t even try.

But if you’re looking for a conservative way to position yourself for a melt-up, consider generating income by selling put options on high-quality companies in defensive sectors of the market. These include consumer staples, health care, and utilities.

[Put options allow you to generate hundreds or even thousands of dollars quickly without buying a single stock. Even better… Elevated volatility increases the premiums you can earn on put options. That means you can earn higher returns and put less of your capital at risk.]

Defensive sectors often show resiliency during economic downturns. Plus, they’ve lagged the overall market this year, so they offer a better value than their high-flying counterparts in technology.

If the market melts up, these stocks will likely see a boost in price. If the economic data darkens, their downside risk is lower since they’re already closer to discounted for that scenario.

Please note: When selling puts, you set aside enough cash in your account in the event you’ll have to purchase shares. This will occur if the stocks are trading below the strike price on the day the options expire.

And make sure you sell puts on stocks you already would love to own. If they fall in price, you’ll get them at a discount. And since most of the companies in these sectors pay dividends, you’ll generate income while waiting for the market to turn.

But a potential rate hike isn’t the only thing coming from the Fed next month. In fact, we could be in store for a July “surprise” from Powell…

The Fed’s July Surprise

According to Daily editor Teeka Tiwari, the Federal Reserve could make a major announcement as early as July 26.

That’s when the Fed will announce a new instant payment network called FedNow.

If you haven’t heard about FedNow, it’ll allow individuals and businesses to send and receive instant payments through the Fed. Banks can also build products on top of the FedNow platform.

The government will deploy the service in phases, with the initial launch taking place in July. We don’t believe many Americans know about FedNow… which is why we call it a “surprise announcement.”

As Teeka has warned, FedNow could be the Trojan Horse to implement a digital dollar in the United States. And those who aren’t prepared will be shocked.

Teeka says two ways to opt out of a possible digital dollar are to own some bitcoin and gold.

He recently put together an entire playbook to show you additional ways to protect yourself and potentially profit from this July Surprise.

The playbook includes:

  • Step-by-step instructions to securely buy and store your bitcoin.

  • The name of a company set to profit from the digital dollar trend.

  • The name of a crypto project also set to profit from this trend.

  • And a secret way to 10x your money on gold.

All you have to do is click here to learn more.

Regards,

Michael Gross
Analyst, Palm Beach Daily