• All was going well in yesterday’s morning trading, but just as the S&P 500 Index pulled into the 4600 level, Fed Governor Lael Brainard sparked a big sell-off in stocks.
• Review yesterday’s Morning Notes, as I warned this might occur.
• This led to a high-speed test of the 4550 area, and the price bounced there at first.
• However, the markets pushed lower into the close, with the S&P closing at 4525 (-1.25%), exceeding our downside and volatility estimates.
• The Fed comments also sent yields surging, with the 10-year U.S Treasury breaking above 2.5%.
• Mortgage rates also surged above 5% for the first time in years.
• There seems to be a pattern here. Every time the market looks like it will rally up near the old highs or even to new highs, one or more Fed governors come out to talk it down.
• We used to talk about the Fed “put” to save the market; now, we need to talk about the Fed “call” to send it down.
• Overnight, the sell-off continued, and we are now trading at 4475, well below the 4500 Volatility Trigger, and practically on top of the 21-day line.
• The 21-day line or mean has always been a great buy point when a new rally gets underway. We will see how this holds up in the current market. Don’t anticipate the buy; look for a true pivot and be careful going long here.
• Indeed, support lies at the 21-day line or 4475, then 4450. Resistance lies at 4500 and then 4520.
• Recall that under the Volatility Trigger, Dealers start selling into declines – making them worse.
• Today, we have another Fed Governor and Treasury Secretary, Janet Yellen, on tap to speak.
• Again, I plan to keep a light schedule this week, taking some time off to celebrate another year on this crazy planet. It gets crazier each year.
• The fundamental backdrop is as bad as I can recall in my career, but the market keeps shrugging it off.
• Partly, this is because the Fed has yet to act on its balance sheet or even higher rates.
• There are a lot of disbelievers out there, betting that the Fed will never do what it says because it would trigger a recession, already likely based on the inverted yield curve and consumer confidence.
• I take the Fed at their word. Chairman Powell does not want the legacy of the highest inflation in a generation due to bad Fed policies.
• Fed minutes from the last meeting come out today. The market may wait until then to take its direction. I expect the minutes to reflect an agressive tightening bias. I don’t think there will be too many surprises.

Have a great trading day.

A.F. Thornton