Fed is the new Waffle House | Exchange places with Tom Bowley

I had no idea the Fed could be such an expert waffler. But as each month passes, that fact becomes more evident. Despite the Fed’s back-and-forth decisions over the past six months, the overall stock market trend remains upward. Need proof? Check out the weekly S&P 500 chart for the past year.

Now, if you haven’t heard anything, would you think differently about this 20-week EMA decline than previous tests of the same level? There was a surge in volume, but keep in mind that it was the December monthly options expiration week. Quad witching months (March, June, September and December) typically have higher trading volumes. Friday’s market recovery occurred before the major collapse on this chart, which appears to be optimistic. I view the stock market action from December 21st to December 31st as the period in which we typically see a “Santa Claus Rally.” More details on this are given below.

The Fed has made clear in the past that they are “data dependent.” However, in recent FOMC policy decisions and subsequent press conferences, Fed Chairman Powell said he had reduced the number of rate cuts expected in 2025 from four to two. That’s because committee members believe core inflation could be higher than previously thought. The first interest rate cut was announced last September.

But here’s the problem. On Thursday, November 14, the Associated Press reported:

The Fed acknowledged in the article that inflation remains persistent and exceeds the Fed’s 2% target level. That day, Powell suggested that inflation could remain slightly above the Fed’s target level for months to come. But he reiterated that inflation would eventually decline. Given the November 14 comments, if the Fed is concerned about inflation continuing to rise, why not change its tune for a 2025 rate cut at the November 6-7 Fed meeting? If they are truly “data dependent,” what data changed between November 14 and the next Federal Reserve meeting on December 17-18 to trigger interest rate policy changes in 2025?

Can I have a waffle, please?

Probability of Santa Claus Rally

Again, we consider the Santa Claus Rally to be from December 21st to December 31st, so let’s see how much higher this period actually is.

• S&P 500: 58 of the last 74 years since 1950 (annual return: +40.50%)
• NASDAQ: 43 of the last 53 years since 1971 (annual return: +61.80%)
• Russell 2000: 31 of the last 37 years since 1987 (annual return: +64.57%)

Historically, the probability of a Santa Claus rally is 78.4%, 81.1%, and 83.8% for the S&P 500, NASDAQ, and Russell 2000, respectively. And in the parentheses above you can see the annual returns for that period. I would say there are a number of historical performances that suggest that the odds of us rallying from here until the end of the year are rather high.

But nothing is guaranteed.

Max Payne

I think the media is promoting the idea that inflation is reigniting and the Fed is becoming more hawkish. I believe last week’s sell-off was due to exactly what I was talking about with EarningsBeats.com members at the December Max Pain event on Tuesday. There was a huge amount of in-the-money call premium and the big names on Wall Street supported the market-making department by telling them how bad the Fed’s actions and words were for the stock market. That Wednesday drop was absolute luck for market makers. We have pointed out to our members the downside market risks that exist due to maximum pain. A day later, voila! It’s magic! The crazy afternoon selling was the highest level of panic selling, with the Volatility Index (VIX) soaring 74% in 2 hours! On Thursday and Friday the VIX retreated back into the 18s (from 28) as if nothing had happened.

There’s a reason I preach about options expiration every month, and it’s just another example of legalized theft by market makers. Let’s give them another golf clap.

Market Vision 2025

The 2025 forecast time is almost here. This will be a big part of the event on Saturday, January 4, 2025 at 10am ET. This year’s MV event, “Year of Diverse Profit,” will feature myself and David Keller, President and Chief Strategist at Sierra Alpha Research. Many of you know Dave from StockCharts and his Market Misbehavior podcast. I look forward to having Dave join me in analyzing what we expect to happen in 2025. For more information about the event and to register, click here!

Happy holidays and we hope to see you there!

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