After hitting equity peaks in the Stock Index Portfolio 26 yesterday, we hit some of the most challenging price action today with a rollover in the stock index futures, creating a choppy order book and Jay Powell speaking in the first 20 minutes of the day session in an interview by the CATO institute.
We were down on the day -$4,500 in the 200K Portfolio and -$1,125 in the 50K Portfolio to bring us back to breakeven on the month.
We were doing well on the day at the highs. The market quickly dropped and we eventually reversed from long to short in anticipation of a continuation lower based on the natural trend in the market. The market reversed again towards the highs. Multiple reversals that are very fast and sizable are challenging to trade.
It was interesting to see AAPL drop while the Nasdaq 100 dropped but the Nasdaq 100 recovered and closed up on the day while AAPL did not recover to the same level and close down on the day. It seemed to be part of the catalyst for the sell off but the market found another reason to rally, leaving AAPL behind.
The Fed's balance sheet dropped only $3.6 billion in the first week of September. Starting this month, the Fed has committed to decreasing their balance sheet by $95 billion per month. The Fed continues to speak strongly while acting softly and those that are calling the Fed's bluff may be right and also the same ones behind the dip buying who seem to unjustly prop up the market. There are many bold voices that are clearly saying "We don't believe the Fed".
There could be a point of realization, if they are wrong, that generates a very fast and big drop in the market. This would be the mean reversion for all the "prop up" price action that we call out.
I saw some interesting commentary on a 20% stock market drop by mid October based on Price to Earnings and core PCE. This would put the S&P at 3,200 and the Nasdaq 100 at 10,000. That sounds right to me but it is difficult to imagine unless the excess liquidity is removed and the Fed follows through.
In my opinion, the Fed should normalize rates and their balance sheet to historic averages regardless of inflation.
We are looking forward to Friday as Friday has been one of our top trading days of the week.