The Fixation with the Fed

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The Fixation with the Fed
Supplemental Video
May 29, 2022
Assumptions
A Heartful Thank You
As I have attempted to figure out a plausible explanation for current conditions, the bigger picture finally came together after watching a YouTube video posted on May 21, 2022, by Ciovacco Capital and viewed on May 24, 2022.
The Ciovacco Capital channel posts videos on YouTube weekly, which are highly recommended for regular viewing.
I have no connection or relationship whatsoever with Ciovacco Capital, but I am indebted to the useful weekly videos that are posted.
The Bigger Picture
2022 has proven to be a very challenging time for the markets. This is not just because prices have been declining but because reliable signals have often proven to lack significant price action follow-through.
A trend is pretty easy to follow, whether up or down.
Choppy markets are harder to navigate and often lead to false breakouts and whipsaws.
This is what has been seen for most of 2022.
The Fed Fixation
No matter how many “positive setups” there have been in 2022, so far, each has broken down and led to lower prices. Why?
The Fed: As the economy changes and goes through cycles, the markets are fixated on the Fed.
This is due to rising interest rates and growth concerns.
Premise: Until there has been a MAJOR POSITIVE shift in Fed policy, it will be very difficult for the markets to move significantly higher.
The Fed’s Balancing Act
The backdrop for this difficult time, on a macro-basis, sits mainly with the Fed.
The economy is experiencing:
High inflation has been brought on mainly by reactions to the COVID-19 pandemic, which include:
Monetary Policy (Fed)
Immediate lowering of the Fed Funds rate to zero
Massive QE programs
Fiscal Policy (Government)
Stimulus checks and other actions to “assist” citizens and businesses
Shutting down the economy
A slowing economy as evidenced by numerous economic reports.
The Fallout
This has produced a potential no-win situation:
In 2022, the Fed must raise interest rates to fight high inflation while simultaneously attempting NOT to slow the economy down too much.
Recession: Two subsequent quarters of negative GDP.
Stagflation: There is a risk that a period of stagflation, similar to what was experienced in the 1970s, may develop. Stagflation is a period of very high inflation coupled with little, no, or negative economic growth.
While the markets have tried to figure out what is happening on a daily basis, prices have floundered since hitting an all-time high in early January 2022.
Prior to the release of the FOMC Minutes on May 25 and follow-up conclusions, no sustainable and longer-term actionable policy had come from the Fed to bring the markets out of the 2022 trading range.
When faced with uncertainty market participants are more likely to sell or remain in cash and “safer” investments, rather than buy (risk-off).
The Fed Put
The Bigger Picture
For all of 2022, my personal bigger picture market view has been as follows:
1. A decline from the all-time highs leading to a significant pullback.
Happening now but may be ending
2. Once a solid bottom is established, a strong uptrend to possibly new all-time highs.
Waiting to happen, or has it started?
3. Once completed, a severe multi-year bear market will take the markets significantly lower.
Waiting to happen, or has it started?

Historical Precedence
1. 2011
2. 2016
3. 2018
4. 2020
5. 2022?
The European Debt Crisis
On October 4, 2011, the catalyst was provided.
Negative Interest Rates
2016
The Fed provided a pivot that allowed for a significant recovery.
Balance Sheet Walkback
2018
In early 2019, the Fed provided a pivot that allowed for a significant recovery.
COVID Plunge
2020
The Fed made an announcement that allowed for a V-shaped bounce recovery which continued until early 2022.
Did it happen?
For the week of May 23-27, there were two key events that may have served to provide the necessary catalyst:
1. The FOMC Minutes were released, which suggested the possibility of slowing down or even pausing rate hikes.
2. The peak in inflation may be happening.
These two events, taken together, may have provided the pivot as seen by strong advances after the FOMC Minutes were released on Wednesday May 25, 2022.
Personal Perspective
Conclusion
Thank You!
John Clay
The SPX Investing Program
John@SPXInvesting.com