- The S&P 500 rallied during the trading session on Friday again, as traders continue to bet that the Federal Reserve is going to acquiesce and give them cheap money.
- However, this is a monster of the Fed’s own making, as they’ve been coddling Wall Street for 14 years.
- This is a lot like what happens when you give your children money all the time, they eventually don’t appreciate it and they expect it to be something that happens in perpetual momentum.
However, the Federal Reserve must deal with something that it has not had to deal with since the 80s, and that of course is inflation. Yes, inflation has come down a bit, but it is still roughly 3 times what the Federal Reserve wants to see. The last thing the Federal Reserve wants to see is loosening monetary policy making inflation return because that was the mistake that the Federal Reserve made in the 1970s. We’ve already been down this road before, and the only way to make sure that inflation does not come back is to absolutely crush demand and a lot of different ways. The most obvious way is to keep monetary policy extraordinarily tight.
Be Cautious with Your Position Size
Jerome Powell even uses the word “pain” multiple times on one of the rare occasions that Wall Street believed him. I don’t know that the man could be any more straightforward. However, most traders and money managers that are out there right now have always lived in a loose monetary policy environment. Quite frankly, they don’t know any better. As we are during her earnings season, we could get a dose of reality sooner or later, but in the short term, it looks like we are going to continue to see the market play chicken with the Federal Reserve.
I anticipate that on Wednesday of next week when the FOMC meeting happens in the statement occurs, he will say something to reiterate the Federal Reserve's hawkish stance. Whether or not Wall Street listens might be a different story, but we are approaching a significant resistance barrier in the form of the 4100 level, so I would be watching that. If we break above there, then it’s likely that the next 100 points or higher. However, be cautious with your position size because of the peace boost in the market, we could go straight back down to the 200-day EMA.
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