A 10% correction is just like walking on the beach if........

While the market is doing basically nothing in the past few weeks with largely a side move, the price action can be considered more bullish than bearish, which will make a new high very likely as of now. The million dollar question is whether or not this bullish new high is sustainable. Sure we can always argue with good reasons to be bullish, I'm not so sure just yet. I'd think a sizable correction is more than likely in the weeks ahead. Here is one more reason to add to my rationale.

We all know the Fed is very supportive to the market by providing capless liquidity when the market needs it. Recent messaging from the Fed can be summed up in two statements, which means the blood for the market will not be drawn back any time soon!

1. "We're not even thinking about thinking about raising rates"

2. "Inflation is transitory"

But if you look at the chart below, it is telling a different story. The index shows global trade volumes in merchandise over the past six years…

Clearly trade volumes have actually surpassed pre-pandemic levels…Can this be viewed as transitory? I'm not an economist but this index trend suggests to me this is a demand-fueled explosion across industries, which is what's pushing prices up across the board. We have all felt the pain of paying more and more of anything we are buying these days, right? 

Then the domestic data on inflation trend. Last month's CPI and core-CPI numbers were higher than economists expected. No one was expecting the April headline CPI to rise 0.8% - that's four times what lead economists were thinking - or for the "less volatile" core-CPI to jump 0.9% - or three times consensus. But what's most alarming is that this was the biggest increase in core-CPI since 1982. Those are month-over-month measures. Year-over-year (YoY) prints were even larger upside surprises. Headline CPI rose 4.2% YoY. Consensus estimates were for a 3.6% posting. Core jumped 3% from a year ago, considerably more than estimates for a 2.3% pop.

It seems to me that the Fed members are also feeling the same inflation pressure and are starting to change their tone. Over the last week, statements from some of them are starting to sound like they may not have everything under control after all… A few members mentioned tapering, which is the first step in the process of winding down from an unprecedented monetary stimulus.

Here's a quote from Philadelphia Fed President Patrick Harker:

"It may be time to at least think about thinking about tapering."

And Dallas Federal Reserve Bank President Robert Kaplan was more explicit. He wants tapering "sooner rather than later." He's worried about "excesses and imbalances in markets."

And then came this head-scratcher over the weekend from Treasury Secretary and former Fed chair Janet Yellen:

"If we ended up with a slightly higher interest rate environment, it would actually be a plus for society's point of view and the Fed's…"

This shift in messaging will likely make the upcoming FOMC meeting on June 16 the most important one in nearly a year! The market has already priced in a minimally two-year no tapering policy and in the past few years, it has been only used to more liquidity rather than tightening in any sense. And we all know the market hates uncertainty and any surprise. So what if the Fed comes out and surprises the market with larger than expected tapering, or even tapering that's ahead of schedule?  If that happens, I'm not sure we are talking about a 10% correction. Actually this scale of correction will be just like walking on the beach if the market starts to feel the tightening is imminent!

Of course by no means I'm saying this is will certainly happen at next week's FOMC. I merely suggest that you better honestly ask yourself whether or not you are prepared if that happens.....Just don't fool yourself by all means!!