Trapped
What? You thought a 850+ point drop in the $DJIA would result in a down week? No Sir. The unholy alliance has struck again. Massive jawboning by multiple administration officials about how well the China trade deal was going, a favorable jobs report and above all, the US Federal Reserve, all contributed to a furious rally to make markets green for the week on (when else?) magic risk free Friday.
What was the tell? The same tell it’s been every week since the beginning of October. When the Fed’s balance sheet rises so does the market. One down week in the Fed’s balance sheet coincided with the only down week in markets since then.
Before you know it you have a trend (via zerohedge):
This is how predictable our markets have become. Tell me the size of Fed’s balance sheet next week and I’ll tell you what markets will do next week. Is it really this farcical? It appears so.
By that measure of course we can presume markets will just keep rising until next June as the Fed has indicated “not QE” will continue until then and their daily repo operations are now the ones on autopilot.
Investors are rightfully cheering gains having now realized that nothing matters but the Fed.
But be careful in cheering too much. All this action hides a rather very uncomfortable fact, a fact that may eventually see the air come out of this ballon faster than it is going in.
And that fact is that the Fed, and all other central banks, are trapped. Trapped in a coming disaster of their own making.
And be clear: As we saw this week again, the air can come out quickly. After all 90% of November gains simply disappeared in a matter of a couple of days. The subsequent furious comeback leaving a rather unusual weekly candle on $SPX (I’ll discuss this separately in an upcoming technical update).
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