Market Journal: The Week Ahead

Extreme chop.

Disclaimer: For informational purposes only.

Please see here and here for more information about The Weight of the Evidence.

Discussion

As I type at 5:39am EST, there is a 59% chance Powell cuts by 50 on Wednesday. Given Powell’s dovish proclivities, I find it hard to believe he’s not going 50, as 25 simply would invite “too much” SPY volatility for his liking.

Maybe I have it all wrong. Perhaps instead of a string of 25s that brings Fed Funds down to neutral by YE25, Powell wants a string of 50s to bring Fed Funds down to neutral by June25, and the way to manage financial conditions is to dangle the threat of “only” cutting by 25 over the course of the inter-meeting period. This would be the mirror image approach taken on the way up, where the threat of “only” hiking by 50 allowed the Fed to string together multiple 75s.

But then there’s the Waller factor, as discussed yesterday. In no way, shape, or form did Waller open the door to 3% neutral by June outside of a material deterioration in the labor market. But again, maybe I’m wrong, and Waller no longer speaks on behalf of Powell.

I don’t know.

But what I do know is this:

SPY is saturated with FED dovishness. You can see it. You can feel it. The odds of a 50 have risen from 15% to 59% in a week, and while yes SPY has risen in response, it should be WELL past ATHs right now alongside Bitcoin ATHs and a heavily pro-risk tilt to equity sector performance.

The Path Ahead

In the September 1 Week Ahead I outlined the following tactical path for SPY.

The following week I updated the path for a hawkish Waller, projecting a retest of SPY $510-520 ahead of FOMC. But the Fed swooped in at SPY $540, cutting off the path lower. So, now we’re back to a version of the original path outlined above.