Trading Desk: The Fed Called The Top But Wall Street Called The Bottom

Every investor who wants to stay in the market any length of time needs to learn resilience fast . . . especially when the outlook turns gloomy and stocks get stuck in a range. As we look toward another anniversary of the 911 attacks, that long view is more important than ever.

My kids and I were honored to help ring the closing bell on the NASDAQ today along with other families who lost loved ones to 911-related illnesses. In our case, it was the kids’ father, a first responder who breathed too much toxic dust as the buildings came down.

He lived for years with the damage. And Wall Street learned to live with the recession that followed. That’s the lesson I want to dwell on today.

After all, this was a day that demonstrated Wall Street’s inner core of strength and resilience. The Fed did its best at Jackson Hole to derail the bulls, establishing a hard ceiling that the market will have trouble breaking until conditions improve.

But today Wall Street showed the Fed something more important. This is as low as stocks get before they attract serious buyers willing to bet serious money that the future will be better than the present.

While that floor can crack and we can stumble, we get up again. Unless the Fed wants to waste substantial effort engineering another shock, this is roughly as bad as the bear market gets right now.

The falling knife spawned by rising interest rates and a slowing economy has now hit the ground again. And that feeds its own sense of relief as well as opportunity.

Why am I so confident, you ask?

Between Resistance And Support

The last few weeks demonstrated that once again stocks can’t convincingly break above the 200-day moving average. The Dow, the NASDAQ and the S&P 500 remain stuck below that line until we get enough good news to smash the ceiling and reach back for historical records.

I don’t see that good news emerging before Thanksgiving at the earliest. There’s just too much negativity radiating from the Fed in the meantime . . . and as we’ve discussed, the intervening earnings cycle will probably be the least constructive since the 2020 lockdowns.

Maybe we’ll start looking toward easier interest rates and stronger earnings as we approach the February earnings season. By that point, I suspect the ceiling will be around 5% lower than it is right now.

But this doesn’t mean stocks go straight down from here. For one thing, the ceiling is still about 4-5% above the major indices now. That’s how far the Fed kicked us at Jackson Hole.

And today turned the 50-day moving average back into tentative support that gets stronger every day it holds. I think it holds.

By Thanksgiving, that trend line will be about 2-3% above where it is today. As long as it remains the floor, we’ll keep moving up from the June bottom . . . slowly but surely.

The future looks better than the recent past. Maybe not a whole lot better, but enough to reward investors who are looking for more than an instant jackpot.

I think that’s the real challenge the market faces now. Expectations have gotten completely distorted in the wake of big tax cuts followed by a profound COVID shock followed by years of extremely loose monetary policy . . . and now the prospect of a Fed-driven recession on the horizon.

Year by year, there’s a lot of noise in the numbers. But over the long run, I know that the return targets really don’t change much.

Before the 2008 crash, stocks generally delivered 8-11% a year depending on the dividend environment. Bonds generally yielded about 4%. Inflation across the cycle took about 3% of that return away.

After the crash, the same long-term numbers applied. The only thing that changed was that inflation went away for a decade. It’s back now, but the Fed is working hard to kill it, using all the tools they’ve accumulated over time.

The long-term numbers reflect over a century of data now. They go back to the 1920s boom, the Great Depression, World War II and all the upheavals since then.

911 was a shock and a heartbreak. Wall Street was closed for days and it took New York years to clean up and get back to work.

But the numbers didn’t change. Stocks beat inflation over time. Bonds struggle.

And that’s just a buy-and-hold strategy. When the market starts trading in a fixed range, we prefer to shift into a trading orientation.

Buy stocks when they dip to support and start to bounce. Sell when they hit the ceiling and get ready for the next dip. Repeat.

Use options to accelerate the gains, creating artificial “space” between the bottom and the top when those lines might be only 4-6% apart.

But keep trading. Hang in there. Keep your eyes on the future. It gets better.

You can see us ring that bell HERE.