This is the real reason the market dropped 📉

Welcome to Friday Eve Folks (scroll to the end for a special lunch invitation),

If anyone tells you they love how the market’s been acting, RUN…run far away.

The only game in town is J-Pow and his big mouth 😮. That’s it!

And the latest example of this was on full display on Wednesday.

You know, I’ve been doing this long enough to remember when markets traded based on price discovery, when traders bought and sold stocks based on what they felt they were worth, free from any outside manipulation.

You know what that means?

I’ve been trading since well before the Great Financial Crisis of 2008, which is when the Fed started to go all in on using its power to manipulate and, dare I say, politicize markets.

By using a combination of its MASSIVE balance sheet and, more recently, widely publicized public speaking events and post-rate decision press conferences, the Fed has been hugely influential in using the stock market to satisfy its “dual mandate.”

Teachable Moment: At its core, the Fed’s dual mandate is simply "maximum employment, stable prices, and moderate long-term interest rates."

I can hear you now saying, “but Jeff, that’s three items.”

While that’s true, the latter two items are essentially treated as one.

While I think there is potential for great danger in the future, it’s hard to ignore that the Fed has been masterful at using the pulpit to inflate stock market bubbles when inflation is too low and popping those bubbles when inflation is too high.

A lot of smart people I know have been saying that the Fed wants to bring this market down even further in an effort to get stubbornly high interest rates lower.

Heck, even before the market opened this week I said, “There is a lot to discuss when it comes to how I see interest rates having such a big factor this week.”

So why did the market immediately collapse just milliseconds after the 2 p.m. Fed statement came across the wire announcing that rates had been held unchanged?

Shouldn't the market have rewarded the fact that market expectations were met, you ask?

While the simple answer is yes, the geeky economist in me dug a little deeper to find you the real reason why the market reacted as it did.

And here it is, the actual Fed statement marked with changes (red text) from the last Fed meeting (black text).

No, humans can’t read fast enough to digest all of that information and click the “sell” button in the milliseconds it took the market to react at 2:00 p.m. on Wednesday, but the algos sure can.

These silicon-based trading systems are programmed to sell based on certain language contained in these releases.

Needless to say, they did not like that economic activity has been expanding at a “solid” pace, because that means higher inflation for longer.

And they also didn’t like that job gains have “slowed,” because the combination of stubbornly high inflation and slow jobs growth wreaks of stagflation.

Then, sure enough, J-Pow projected a “hawkish” tone at the follow-up press conference, further driving home a “higher for longer” tone that the market was not expecting, thereby pushing the market to new intra-day lows.

So what happens next?

Will the Fed succeed at driving the market even lower?

While I have my suspicions, it’s questions like these that I take on with my members in Alpha Hunter.

And tomorrow (FRIDAY), I’m inviting you to lunch with me (12pm EST) as we share our trading woes and make our counter-plans of attack!

Add this to room link to your calendar for 12EST Friday!

So pack a brown bag 🥪and come see me tomorrow,

To YOUR success!

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