Wednesday is the Fed meeting announcement day, which is a huge uncertainty for the market. Betting on the market response is a toss of a dime and Powell is notorious for spooking the market during his post-meeting news conference. On the other hand, the market has been already beaten down so much with so severe pessimism created. It is hard to see a more severe selloff that will persist for days. Of course, we never know exactly what is in the mind of the Market God!
Retail Investors Panic As Market Plunges (by Lance Roberts)
Last week, we noted:
Notably, despite the market's failure to hold previous gains, it successfully retested and held the lower trend line. However, sell signals remain in place and have not yet reached more oversold levels. The concern remains the Fed's more aggressive stance to battling the inflation surge, which hit 7% annualized this past month.
This past week, retail investors began to panic sell as "meme" stocks fell apart. Previous favorites became an anathema from AMC to Gamestop to Pelton and Netflix. The selling pressure took the S&P 500 below its trendline support, deep into oversold territory, and well into 3-standard deviations below the mean.
The selling pressure was worse in the Nasdaq taking that index to extreme oversold and 4-standard deviations below its 50-dma. Such is the worst start for the Nasdaq since 2008 and is at support from October lows.
Friday was problematic for stocks due to the $3.3 Trillion simultaneous expiration of index and stock options.
The "good news," if you want to call it that, and as noted by Zerohedge, is there is now a good bit of "combustible fuel" to create a counter-trend rally heading into the Fed meeting next week.
"The extreme negative / short Delta" across all option expiries is at risk of becoming a combustible fuel for a mechanical squeeze if spot rallies. There is over -$107B of front-week Delta alone."
All this means is that investors are now all on "one side of the boat," which is a prime setup for a counter-trend bounce.
However, it is likely a bounce you will want to use to "derisk" your portfolio.
The Big Risk Next Week
Next week is the January meeting of the FOMC. The results of that meeting will set the market's tone for the next few months. With the markets already in correction mode, the big question is whether or not the Fed will press ahead with monetary tightening.
On Friday, I took a poll asking whether the Fed will forge ahead with tighter policy (hawkish) or try and soften its stance to maintain financial stability (doveish).
As discussed previously, the Fed's most considerable risk remains the "stability" of the financial markets. While the Fed is concerned about "inflation" and its impact on the economy, financial instability is a greater risk. Just as in 2008, a cratering financial market undermines economic growth and exacerbates the risk of a financial crisis from a highly leveraged economy.
We suspect the Fed will ultimately opt for financial stability. However, the Fed has a long history of making the wrong choice first before coming to the rescue.
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