As stock after stock surrenders to the Jackson Hole undertow, it’s clear that Powell and company just aren’t going to let Wall Street defy their inflation-fighting efforts by creating wealth faster than they can take it away.

They’re reportedly happy to see investors scattering for cover. And I think I’ve discovered a subtle hint in the way the Fed has played its cards that reveals just how far they’re willing to let the bulls run before they talk stocks down again.

Call me crazy, but I’m going to call it right now. If the S&P 500 is trading above 4,100 when the Fed starts its November policy meeting, then either Jay Powell is a pushover or the October earnings season will be a lot better than anyone currently anticipates.

And that means it’s going to be a bumpy couple of months. There’s money to be made here . . . but you need to adopt either a short-term trading orientation or accept that instant gratification is going to be precarious to achieve.

“What’s my tell,” you ask. Read on.

Coordinating The Market Clockwork

Everyone at the Fed is aware that trillions of dollars of American wealth hangs on their faintest nuance. This isn’t the old days when Alan Greenspan could pretend not to know that his words moved markets.

And they understand that a lot of that money moves on semi-automated trading systems that look for statistical cues just like we do. When selling gets so heavy that it defies the statistical limits, for example, it’s usually a buy signal.

Because those systems are automated, it would be counterproductive for the Fed to talk stocks down at a moment when it would trigger the buy signal. The Fed looks weak then. They don’t like that.

Instead, they want to drop the truth bomb when it can trigger a sell signal . . . a moment when the bulls could go either way if left to their own devices.

And that’s exactly what happened last week. The Fed doesn’t control the calendar. Jackson Hole happens at the end of August every year. Powell was going to talk either way.

But he could’ve reverted to his comforting “no crash here” persona. Instead, with one eye on the market, he saw that the bulls were vulnerable. Stocks looked overbought. Big benchmarks were struggling to break resistance and get back to work repairing the damage the bear left behind.

That’s when Powell decided the bulls had gone far enough. While he could have given us all a fresh reason to cheer, he didn’t.

The timing was too coincidental to ignore. In hindsight, the Fed was comfortable letting stocks rally back to the 200-day moving average . . . but not significantly higher. If I’m right, whenever the market as a whole hits that line again, they’ll kick it back down until they’re willing to declare victory.

I don’t think they’ll declare victory before the November 2 policy meeting. That means we have exactly two months to grind our wheels knowing that a hard ceiling is in sight.

Moving Average, Moving Target

And here’s the thing. Wrestling inflation back into submission requires the Fed to keep sucking liquidity out of the economy. They won’t settle for what they’ve already achieved.

A month ago, they let the S&P 500 climb back above 4,300 because even after that rebound, over $4 trillion in paper wealth had vanished from the market. That’s substantial progress for the Fed, even if it’s a big step back for investors.

But it didn’t achieve the goal. Prices aren’t actively climbing any more, but it’s going to take a few months before the Fed can be sure that interest rates at these levels can keep prices stable.

Meanwhile, if I’m right about the 200-day average being the upper limit of the Fed’s comfort zone for the market in the meantime, we have to grapple with the fact that trend line is receding. It points down.

Extend the line another couple of months and you end up at a place 4% lower than it is today. Maybe the Fed will let stocks surge past that place under the right conditions . . . but while I love it when that kind of utopian scenario materializes, I never plan on it.

In early November, the S&P 500 hits the 200-day average about 4% above where it is now. Anything above that line, the Fed looks eager to take away.

This is not to say stocks can only rally 4% back from here. I wouldn’t be shocked to see a bounce in the next few weeks at least test 4,250 . . . and make a lot of short-term swing traders happy.

But if the bulls dare test much above that line, the Fed will find some way to trigger another sell signal. And by November, if I’m right, the ceiling will be a lot closer.

Again, I’m happy to be wrong. However, Jackson Hole shows the Fed’s parameters a lot more clearly than people in the bond market are letting on.

After all, the Fed is letting bonds twist. That’s not where the real liquidity they want to destroy is concentrated. The real center of all the free COVID money is in the stock market.

That’s what they’re watching. Now how do we play this?

Squeezing Gains Out Of A Rangebound Market

First, the Fed isn’t watching individual stocks. They’re watching the market as a whole. If you can see a stock with the potential to surge more than 8% in the next few months, you have a very good shot at beating the market.

There are still strong companies disruptive enough to break the ceiling . . . and battered stocks where the implied ceiling is a long way up from here. One way or another, they have the potential to outperform.

Remember, earnings season can change all the parameters. A great quarterly report is a buy signal that even the automated trading programs have to respect. Their programmers will incorporate good news into their framework and keep buying.

We aren’t anticipating a great earnings season for the market as a whole, needless to say. As I’ve discussed, the October quarter will probably be the weakest one of the cycle so far, with little opportunity to raise the bar before January.

But energy might do well enough to surge when those numbers come out. The Fed doesn’t care about that. Energy is a very small slice of the S&P 500 at this point.

Airlines might do well. Automotive. Even retail. Concentrate on strength and ignore obvious weakness like the banks.

And you can also use options to multiply the amount of profit between the limits of a known trading band. We do that all the time.

Say a stock can run 8% before running into resistance. Buy options that can do more in the same amount of time. The math is not hard.

That 8% might translate into $20 on a big stock like Microsoft (MSFT). If you buy calls to exploit that kind of move in the underlying stock, you might pay $3 or less . . . but if the chart goes your way, those options will be worth a lot more than $3 before you need to go.

Again, we do this all the time. It’s how Wall Street survives in rangebound times.

We don’t buy and hold all the time. Only Warren Buffett types have the luxury of an endless time horizon.

And guess what? Right now, the options market tells me other traders think the S&P 500 might be at most 4% above its current level by the time November rolls around.

Don’t fight the big money. Don’t fight the Fed. Work around them.