Powell's Hawk Costume

You have to give Powell credit for keeping up the hawkish act, he should win an Oscar with his performance since Jackson Hole.  He could have been honest and eased off the brake a bit to match the somewhat dovish statement but apparently he didn't like the way stocks rallied after that leak to the WSJ before the quiet period.  The huge 250 point SPX rally was just too much bull for Jay.  He didn't want to redo that fiasco in July/August when he loosened financial conditions even as inflation and nonfarm payrolls were coming in hot.  This time, he wasn't going to be mealy mouth and noncommittal, he would lie if he had to.  Forward guidance is a way for the Fed to tighten financial conditions without having to do any rate hikes.  He tried to get the market to expect a higher terminal Fed funds rate but at the same time, admitting that he would likely step down in upcoming meetings. 

Whenever the Fed guides beyond the next meeting, you can basically throw that forward guidance into the trash can.  The Fed usually tries to go through with what they hinted at for the following meeting, but beyond that, it comes down to financial conditions and the data.  If you get lower than expected inflation numbers and weaker nonfarm payrolls in the coming months, Powell will slow down to 25 bps in February, and if its weak enough, pause right there.  Whatever he said at this meeting will be long forgotten in early 2023.  It looks like its going to be 50 bps in December, and then a big question market for February 2023. 

Rates are getting to a point where the stock market has to compete for fund flows with money markets and T-bills, as a risk free 4+% is quite attractive compared to stocks that are still historically overvalued with earnings declining.  When cash becomes a more attractive asset, it tends to suck money out of riskier assets, which should feed through to credit spreads widening and stocks weakening.  Nothing happens in a straight line, but that's the gravitational force the stock market is fighting at the moment.  

The volatility continues to be off the scale, its underappreciated because its been like this all year.  This kind of volatility assures that vol target funds and systematic strategies will not be coming in to support the market anytime soon.  

Its not a good long term sign for the stock market when you see the big cap tech stocks get destroyed.  These are the sentinels of the market, the drivers of the animal spirits.  When the retail favorite tech names get crushed like this, it makes retail less willing to invest in the market.  If these tech stocks continue to be out of favor, watch for retail outflows.  There was so much money pumped into stocks in 2021, and early 2022.  There is a lot of money stuck in stocks and equity ETFs, when investors start to give up on the stock market, you could see a deluge of outflows which could take the SPX to that 3000-3200 level that it traded at pre Covid.  

Got that big selloff after the Powell press conference.  The market was just a bit too hopeful for a less tough Powell, and he disappointed again.  This is not the norm, and traders should not get used to a tough talking Powell.  But the data was just not weak enough for any dovish talk.  Lots of events coming up in the next few days: nonfarm payrolls, midterm elections, and then CPI.  The fast money bulls are selling ahead of those events, for fear of a repeat of what happened in September and October ahead of the data.  Still think the bulls will try to rally the troops one more time after the events are behind us, but that's probably going to be the last decent rally before a continuation of the downtrend.  Those looking for SPX 4100-4200 are still clinging to hopes of a repeat of that bear market rally from June to August.  With yields unrelenting, along with a tough Fed, doubt you see above 4000 this year.  I am waiting for a bear market rally to put on shorts again, anything above 3900 would be a good risk/reward short.