All eyes were on Fed Chair Powell as he presided over the January FOMC this week. It was one of the most seat grabbing events, not because of his commentary, but more so as the markets across the board were at inflection points.
Since the bear market started last year, the S&P 500 rallied the last two months of the year, the dollar fell, Chinese markets rallied, emerging markets were up as well and the new theme in town was "China reopening".
The S&P 500 was flirting with its 200-day moving average around 4050, the downward resistance trendline that had been in place all of last year. The question on everyone's mind was, "Will it break this time around?" This is the desperate question being asked by FOMO traders and retail investors as they are eager to chase any momentum to make up for the P&L lost last year.
But we know how markets function, especially bear markets. These tend to suck bulls in right at the top, and trap the bears at the bottom. Commodity traders are the ones moving this market, and algos have the knack of causing wild moves as they attempt to break key levels. But the investor needs to choose a narrative rather than chase one as often times these breaks provide false traps.
Chair Powell did not say anything other than what he has been saying all along. The market just chooses to interpret it the way it wants, or rather wishes. Inflation has been falling, of course it would given the central bank has raised 450 bps so far in one year. But it remains elevated, implying "more work is to be done" still.
The fact that the chairman did not push back on financial conditions easing, gave the impression that he did not mind it, triggering the bears to cover their shorts and chase the market higher. The fact of the matter is that the Fed knows as much as the market does, or perhaps even less. They try to make predictions, but all they really do is confirm what has already been priced in by the market. After all they kept saying "inflation was transitory" throughout 2021.
Powell did acknowledge that there is a disconnect between how they see the rate cycle playing out and what the bond market seems to be implying. The market assumes that the Fed will move from a rate hiking cycle to cutting rates by the end of this year without any hiccups. This is the area of most contention as the Fed is convinced that they will be able to manage a smooth landing, avoid a recession, and get back to trend growth with their rate tightening.
Short term traders are betting on this as they chase long duration trades. History is not on their side as no hiking cycle has ever ended magically without skeletons in the closet appearing. And not to mention with there being so much debt and leverage in the system.
Positioning is what is driving this market more than fundamentals. Correlations are great as long as the data supports the circumstances and fundamentals. But traders seem to be blindly chasing sectors and stocks on back of movements in the dollar and bonds without understanding what is really moving them as some factors tend to take precedence. We have seen that with technology as they chase duration, which goes against the earnings coming out of the big techs like Amazon (AMZN) , Alphabet (GOOGL) , and even Apple (AAPL) .
A short dollar does not necessarily imply a commodity rally, as oil continues to stay weak despite its fall. This is not like 2020 and certainly nowhere close to 2009. If we look at the long/short systematic funds, day on day and month on month volatility is very extreme causing alarm bells to flash on their VaR (value at risk) models. These are not normal markets and one should "trade" them, not invest in them. Time shall tell who will be right, but the bond market has always had a much better track record than the Fed really.
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