Hey There Income Hunter,
The European Central Bank announced its rate hike yesterday, which initially sent stocks plummeting only to be squeezed higher after hitting support …
Then, similar to what the Fed likes to do, the ECB sent post-meeting leaks of another .75% rate hike in October and stocks whipsawed back down near the lows just after lunchtime.
Then it was Powell’s chance to speak during a Q&A session with the Cato Institute. However, he simply reiterated his hawkish sound bites from Jackson Hole …
“We need to act now, forthrightly, strongly as we have been doing and we have to keep at it until the job is done.”
At this point, the market will need some shocking news to break down below the 3950 level, which is the gamma pivot that could accelerate the downtrend.
Today, we’ll look at what shocks may be ahead and the technical setup as we head to a large options expiration on Sept. 16.
QT May Create Bank Selling
The Fed likes to think it can control liquidity, especially when it comes to bank reserves, but it doesn’t …
If market liquidity drains bank reserves, they could fall below the Feds minimum threshold, which is 8% of GDP. QT will drain bank reserves, which are now double the size of previous months ($95 billion per month).
The Fed also cannot control the $2 trillion parked in the reverse repo facility. Fed leaders mention those funds as excess cash, but they don’t control them, so if financial conditions continue tightening that money may be needed elsewhere.
The bottom line is, QT can quickly reduce liquidity and cause plumbing problems for the banks and the Fed.
As you can see in the graph below, increasing QT when the economy is weak has not worked out in the past …
SPY Technical Set-up
The uptrade over the past couple of days has occured on low volume. As you can see in the chart below, we also have strong resistance above as the 50 & 200 dmas converge …
We have the CPI inflation report next week and bond supply in 3-, 10-, and 30-year bonds …
Those two events could attract new sellers prior to the Fed meeting on Sept. 21 …
So, probabilities still favor playing SPY from the bearish side until it convincingly trades above 401.
Bring It Home
Some traders call the 20-30 Vix range the chop bucket, and this week that has been a good label for this market.
The majority of investors still believe the Fed can engineer a decrease of inflation without causing a financial system meltdown. And I understand that after 25-years of the Fed having the market’s back.
However, this time is different from the standpoint of the government’s debt burden.
It may take time to see the damage done by its aggressive tightening here in the US, and right now we happen to be the least dirty shirt in the laundry, so money is flowing our way …
Enjoy it while it lasts and as always …
Live and Trade With Passion My Friend,
Griff