Inflation has two components. First, it has the monetary side. In that regard, both Congress and the Fed have screwed this economy into oblivion by flooding the money supply with their record deficits and other economically suicidal policies. That is why prices are skyrocketing.
But there is a second component that involves the rest of us. It is the psychological component involved in whether the population “accepts” or “rejects” higher prices. When inflation becomes ingrained in our collective psyche – it isn’t easy to put the genie back in the bottle. That is where we find ourselves today, probably awaiting one of the most important Fed announcements of all time.
There are two camps. The first camp, cynical of all that has gone on the past few years, believes that the Fed does not have the guts to crack down as is necessary. The Fed would need to stop the QE taper, raise interest rates, and then bring on a recession. The Fed would finish off Joe Biden’s Presidency in the process, and the Democrats (like the Republicans after the Great Depression) would not see majorities again for a generation.
Recall that while Fed Chairman Powell has been reappointed, the Democrat-controlled Congress has not yet confirmed him. So while the Fed’s independence and credibility are at stake, so is Powell’s job. It is not an easy position for him. Moreover, Congress has/is rendering the Fed irrelevant with its recent fiscal policies.
The second camp believes that while the Fed screwed this up big time, it is not too late to tame inflation IF Powell is sufficiently aggressive. That will require pricking the asset bubble. The stock market could lose half its value in the process.
Swing Traders
We are 100% cash on our swing trading model now, after being stopped out on Tuesday’s monster Producer Price Index reporting almost 9% wholesale inflation. While this position is prudent, we risk missing a nice rally between now and year-end. But so be it.
When we hit our stops Tuesday, I had too much experience to ignore them. Stops have saved my bacon more than once over the years, even though I believe that a surprise rally is in the cards after today’s Fed meeting.
Day Traders
This is not a good trading session unless you are gambling or have a specific strategy around the Fed announcement. Also, Friday’s quadruple witching expiration, which often draws the market down, complicates matters.
Other than that, today is when the Santa Claus rally typically launches. It is also the technical bottom of the 80-day cycle, were the cycle to be perfectly symmetrical. Likely, it has already bottomed and is deciding whether it will have left or right translation.
Fear gauges are more bullish than bearish, meaning fear is high. I will go out on a limb and say that for today, the more aggressive the Fed announcement, the more likely the market will rally for a few days.
If the Fed is not aggressive and appears tolerant of the inflation at hand, then the market is likely to correct significantly. So what the market needs to hear is that the Fed is willing to accelerate the taper and raise rates sooner rather than later. We will see how well my prediction becomes a reality.
Day Traders – we are close enough to the 50-day line at 4685 to use that as your line in the sand and magnet today. All major indices are on their Weekly Expected Move lows at the open (about 4625 at this writing). Selling will accelerate considerably below the WEM low and you can target the 50-day line first.
At this writing, the bull market is very well intact, and none of the price action in December has violated the uptrend on the S&P 500 or NASDAQ 100. But we have lost the broader market, and the generals have been waning over the last two sessions. So the problem at hand remains, will the generals fall, or will they pick up the rest of the market and take us to new highs?
A.F. Thornton