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Has Rule Number One Been Repealed?

Rule Number One is “Don’t Fight the Fed.” But Wall Street and its willing herd have done just that for the past month.  Stocks have continued to rally, and bonds have held their own, both in the face of increasingly tighter macro liquidity as the Fed whispers easy while tightening the noose.

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A big reason for the rally is that the stock market became so oversold relative to the liquidity trend in May and June. That condition warned us of the potential for a sharp rally. The market had become too stretched on the downside. It was enough to drive persistent short covering, and ultimately margin buying, as Wall Street searched frantically for excuses to buy stocks. Non-subscribers, click here for access.

Sure, the rally feels surprising and frustrating, but the warnings were there, and I posted them in the last two CLI updates in May and June. Non-subscribers, click here for access.

May 23-

…stock prices have gotten ahead of the curve. They are now oversold versus the historical norms of the liquidity band over the past 13 years.

…with the oversold condition comes the likelihood of vicious vertical spike rallies along the way, as overconfident short sellers load up on their positions.

we need to be on the lookout for the start of a spike rally. If you see it, believe it.

June 28-

The previous lows were in the context of a bubble market. This is a bear market.  That doesn’t rule out a sharp rally. In fact, I think we should expect to be surprised on the upside.

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Meanwhile, the Street and its media handmaidens grasped for straws, and they found them. They found them in the “moderating” CPI report, and in the Fed meeting minutes. From these reports, they inferred that the Fed would err on the side of ease instead of constant tightening. Naturally, they misread the data and the fact that the Fed minutes are propaganda. Non-subscribers, click here for access.

So much for the narratives. The fact is that the market can only run counter to the macro liquidity trend for so long before the short covering and animal spirits that drive margin buying are exhausted. And if Wall Street is engaging in fantasy, as I think it is, then at some point, probably soon, a moment of recognition will set in. The selling will start, and the rally will reverse. Non-subscribers, click here for access.

How do we know when? That’s a matter for the technical analysis. Non-subscribers, click here for access.

The TA that I cover in the weekly Technical Trader reports has been remarkably accurate on the broad market, but less so on the individual swing trade picks, where it’s been more miss than hit in the last month. This dichotomy between the micro and macro TA is an indication of a fractured market that is not as strong the gain in the major averages suggests. There’s a lot of scurrying around as traders look for the next hot stock or the next short squeeze. A few are hitting big, while others pull back or churn in a range. That’s enough to power the broad averages higher. Non-subscribers, click here for access.

The technical projections for the market averages have pointed to xxxxxxxxxx xxxxxxxxxx xxxxxxxxx range for several weeks. They’re xxxxxxx xxxxxx xxxxxx. Non-subscribers, click here for access.

Longer intermediate swing projections point xxxxxx, but I’m skeptical. The liquidity situation is turning more bearish as the Treasury pounds the market with new supply and the Fed holds firm on QT. The Fed is set to tighten the screws even more in a couple of weeks. It announced that they will double QT to $95 billion per month in September. Non-subscribers, click here for access.

Regardless of Wall Street’s fantasies, neither the markets nor the inflation data, nor the economic data, will keep the Fed from its appointed rounds. The strength in all three will keep the Fed on track. It is likely to stay on that track until something breaks. The Fed is never proactive. It is always reactive. It drives in the rear view mirror. The Fed will only loosen after the crisis, not pre-emptively. Non-subscribers, click here for access.

On top of the Fed tightening, the US Treasury will be in the market with even more borrowing to fund the new spending program just signed into law. That borrowing will suck cash out of the financial markets and pump it into the economic stream. It sets up conditions where stronger than expected economic data could continue to surprise the economists, the Street, and the Fed. So what would be the Fed’s excuse to stop tightening? Non-subscribers, click here for access.

Furthermore, despite all the speculation that the Fed will take its foot off the brake, sticky CPI at 8.5% will hardly allow that. The idea that the end of tightening is near is wishful thinking. Especially with another surge of government spending on the way. So keep in mind that the Fed drives in the rear view mirror. The Fed will continue to remove money from the system. And the currently strong financial markets will only encourage that. Eventually that will result in a crunch, and the market will fold. Non-subscribers, click here for access.

The time to reverse course and get short for trades is coming xxxx to a trading screen near you. The TA will tell us when. In the meantime, riding the current wave xxxxxxx xxxxxxx xxxxxx. Non-subscribers, click here for access.

That’s especially true for the bond market where yields are on the razor’s edge. Wall Street has been spreading a lot of fertilizer about the 10 year yield going to 2%. But another couple of upticks in that yield now around 2.80-2.85 will xxxxx xxxxxx xx xxxxxxxx xxxxxx, and probably a xxxxxxxxxx xxxxxxxx xxxxxxxxx xxxxxxxxx xxxxxxxx. Non-subscribers, click here for access.

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Posted in 1 - Liquidity Trader- Money Trends, Fed, Central Bank and Banking Macro Liquidity
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