Fed Babies and the Dark Cloud

 It sometimes odd how these short term traders react to the FOMC meetings.  How do you get a big move higher and then a big reversal lower when nothing has changed?  Yesterday, going into the FOMC meeting, most traders seemed to be expecting very little, but did expect Powell to be dovish.  And Powell was dovish but didn't do anything, so pretty much what was expected, but the market was "disappointed".  Not enough "clarity".  These traders have become a bunch of Fed babies. 

The expectations are sky high for Powell.  His duties now include hand-holding short term traders so they don't have a tantrum because they didn't get to hear what they wanted.  The markets have been babied so much since the January 2019 dovish pivot that it is what the market expects.  And if it doesn't get coddled and told what it wants to hear, then the reaction is to sell.  That is what you saw after the June FOMC meeting when the market sold off huge the next day.  It is what you are seeing now after yesterday's FOMC.  

Both stocks and bonds have sold off on the news.  And so has gold.  That is the holy triumvirate these days.  It used to be stocks and bonds only.  But now gold is such a crowded trade that if it starts going down, it starts to affect stocks negatively.  Even when its such a tiny market in comparison to the stock and bond markets. 

The dark cloud hanging around in the background is the election.  Now less than 50 days remain till the big day.  The market hates uncertainty.  Frankly, I don't see what the big uncertainty is because we'll either have Biden or Trump, and they will both be spending lots of money and that is what the market wants.  But the market doesn't move based on how I think about things, it moves based on what the masses think.  They are afraid of a contested election.  The masses are scared of either Biden winning and raising taxes and Trump claiming election fraud and not accepting the results, or Trump winning and Biden claiming election fraud.  

In either case, eventually one or the other will be president and it won't affect the policy outcomes which will be MMT based government spending with the Fed buying up bonds to keep up with it.  I expect the market to eventually come to the same conclusion but probably only right before the election, so this correction should last for several more weeks.

SPX 3425 has been a hard ceiling for all bounce attempts.  I don't see that changing until election day.  Its possible you can get a slight break higher above 3425 but I eventually expect continued selling afterwards.  The bottom end of the range, towards SPX 3300 will be tested in the coming days as we'll have stock buyback blackout period coming up next week along with a big quarterly pension rebalance out of stocks into bonds (estimates around $150-200B).  In this type of environment, a big rebalance could really pressure stocks lower.  I don't see so many willing dip buyers anymore.  The technical damage over the last 2 weeks is substantial.  From past parabolic blowoff tops (e.g. Jan-Feb 2018) , the selloffs usually last longer than the flattening uptrend and then sudden drop type of selloffs (e.g. Aug 2019).   

With the big gap down today, I am just watching but any rally attempts in the next few days should fail quickly.  Wanted to short this Friday hoping for the market to hold up until then but that doesn't seem likely.  I don't see the bottom for this selloff until you get closer to SPX 3130.  The market is still way above the 200 day moving average, and that has acted like a magnet drawing prices closer toward it in selloffs.  Right now, the 200 day MA is around 3100, so still lots of air underneath.  The market has rallied so strongly over the past 6 months that consolidation will likely take longer than your usual corrections.  1.5 - 2 months is around what I am expecting, so we should hit bottom sometime from mid to late October.