Submitted by QTR's Fringe Finance
The market is literally not only fighting the Fed, but also fighting reality. On Thursday, markets opened up lower for a number of reasons:
Wednesday’s Fed minutes were hawkish, indicating further rate hikes
The bond market pushed yields higher
Macro data on Thursday morning, including one of the manufacturing surveys and ADP Employment numbers came in far better than expected, indicating the economy is still strong, thereby sending the message to the Fed that they can further try and cripple the economy by raising rates higher
By the end of the day, the market had pared a lot of its losses, despite continued devastating blows to any type of real or imaginary reality investors have constructed about the market.
Both the sell side and the financial media have come up with innumerable bullshit explanations for the melt up in the market over the last 18 months.
They have cited zero day to expiration options, gamma squeezes, emerging trends in artificial intelligence, new paradigms for market valuations going forward, and astonishingly, even an increase in liquidity at the same time that the Fed is actively tightening.
Whatever one of these “excuses of the day” you feel like picking to explain the run up doesn’t matter. All of these explanations fall under a giant umbrella of nonsense and the explanation for the move higher is much simpler: justifying irrational market moves with bullshit creates fear of missing out, which draws money off the sidelines, and begets speculation despite the Fed’s current monetary policy stance.
An even simpler way to say it is that the market is simply “fighting the Fed”.
As I’ve written about a number of times before, this insane anomaly – and it will turn out to be nothing more than an unprecedented bull trap - remains. This move is simply the lingering remnants of 20 years of dip buying always proving to be the right strategy. This was the right strategy because we experienced 15 years of unprecedented monetary easing. Now, most investors’ brains are still stuck in the year 2015 or 2021, despite what can only be described as sustained seismic shifts in the direction monetary policy is currently heading.
Like a mentally damaged adult, unable to process trauma from their childhood and stuck in a pattern of negative behavior that they can’t get out of and don’t know why they’re in in the first place, the market is forging forward against the grain of reality and monetary policy despite the negative coming consequences.
Don’t get me wrong. I’ve been saying that a limit down day was coming for 18 months and I’ve been deadass wrong since then. Well, technically, I may not be proven wrong, because it may happen – but my timing has certainly been fucked up, I’ll admit to that. My reasoning for suggesting a limit down day was coming – generally that the economy will cause the market to revert to some type of mean once it collapses due to Fed policy – held true while the S&P was 30% lower a year ago. In essence, what that means is the more the market fights higher from here, swimming up the monetary policy stream, the quicker and sharper the move down will become when the reality check meets the road.
We may see plenty more days like Thursday, where the market sees bad news and correctly decides to trade lower at first. but then prevailing psychology from the last two decades takes over and people either start to believe that bad news is good news, which it isn’t when the Fed is tightening, or that dips will simply be bought, regardless of rhyme or reason. Thursday wasn’t a devastating move lower because the market still has confidence. We’ll see more days like that until one day that confidence has waned enough for something to snap. Here’s the fundamental case to back up my stance.
And so, we are literally running off the fumes of the psychological monetary policy driven rocket fuel gas tank we filled up over the last decade. When these fumes dissipate and the market catches on that the Fed manipulation game has officially ended, expect the market to move sharply lower. It’ll be another event where no one should have been surprised, but everyone will be. And now, with the market 30% higher than it was when the Fed started to raise rates, the sharp move lower means we need to go down to that point and then continue to revert to the mean lower from there.
The market will officially be Dark Helmet from Spaceballs when his ship finally stops traveling at Ludicrous Speed and he isn’t buckled in. So, the lesson of the day is make sure you’re buckled up (hedged). Don’t be the investing equivalent of Dark Helmet.
For a list of what I own and how I’m personally positioning myself, check out my portfolio review, released just a couple of days ago.
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QTR’s Disclaimer: I am an idiot and often get things wrong and lose money. I may own or transact in any names mentioned in this piece at any time without warning. Contributor posts and aggregated posts have not been fact checked and are the opinions of their authors. This is not a recommendation to buy or sell any stocks or securities, just my opinions. I often lose money on positions I trade/invest in. I may add any name mentioned in this article and sell any name mentioned in this piece at any time, without further warning. None of this is a solicitation to buy or sell securities. These positions can change immediately as soon as I publish this, with or without notice. You are on your own. Do not make decisions based on my blog. I exist on the fringe. The publisher does not guarantee the accuracy or completeness of the information provided in this page. These are not the opinions of any of my employers, partners, or associates. I did my best to be honest about my disclosures but can’t guarantee I am right; I write these posts after a couple beers sometimes. Also, I just straight up get shit wrong a lot. I mention it twice because it’s that important.
