Market Milestones: Mr. Money Man

America’s Presidential election is just 45 days away, and the political race is heating up. Meanwhile, Jerome Powell, the "President of Money," the most powerful man in the world, announced what the monetary policy for America—and therefore the world—would be. Calling him the President of Money isn’t technically accurate, as he is not elected, answers to no one, and creates money out of thin air.

The Federal Reserve has a dual mandate: to maintain stable prices and ensure full employment. The United States left the gold standard in 1933, and Nixon made the breakup official in 1971 when he ended the Bretton Woods Agreement and suspended the convertibility of the U.S. dollar to gold. Since leaving the gold standard, the Federal Reserve has been responsible for controlling inflation while the government continues to spend wildly and ramp up the nation’s debt at unprecedented levels. With the entire world economy in the hands of a few unelected officials, what could possibly go wrong?

On that note, Jerome Powell, the "Money Czar," cut the interest rate by 50 basis points on Wednesday, a move typically reserved for times of economic turmoil. The only other times the Federal Reserve started its cutting cycle with a 50 basis point cut were in 1999, 2007, and 2020. If we think hard enough, we might be able to find a central economic theme linking those three years.

This has led many to assume that the Fed is cutting aggressively because it is concerned about the state of the economy. With inflation still above the Fed's 2% target and not expected to reach that goal until 2026, such a strong cut out of the gate does seem strange. This is especially true if they don’t see any elevated risk of an economic downturn as “Money Man,” Jerome Powell, indicated on Wednesday. Some have suggested that such a large cut may be a partisan political move, given how close it is to the election. It certainly wouldn’t be the first-time political pressure influenced the Federal Reserve’s actions.

So, what does this mean for the direction of the market? The general rule of thumb is: don’t fight the Fed. Since 2008, this has essentially meant that the Fed will prop up the market, injecting liquidity as needed, even up to QE infinity, as seen during the 2020 COVID crash.

SPY

We mentioned in our Thursday RLT Newsletter that the market's reaction to the last FOMC day on July 31st was a fake-out, leading to a 2.5% reversal the very next day on the QQQ. And what do you know, we got that exact same price action again, this time with a 2.5% reversal to the upside. Thursday’s gap was quite strong as it gapped above a major horizontal resistance, trendline resistance and two prior days bear candles. Whatever the Fed is doing, the market likes it, at least for now. This positive reaction to the rate cuts puts the market direction firmly on the side of the bulls. The 9/11/24 candle already did that, but Thursdays price action further solidifies the bullish trend.  With the SPY already at all-time highs and the QQQ lagging, we are watching the QQQ closely for resistance levels and targets. The QQQ may retest its upward trend line in the next few days and then head towards the overhead gap at $493.15.

QQQ

The QQQ is lagging the SPY because semiconductors and big tech, which used to be leading this market higher, are lagging behind quite considerably. The SMH is not even above its 100DSMA and NVDA remains well below its August highs. The only mega tech joining the SPY at all-time highs is META which just broke out of a massive ascending triangle spanning most of 2024. A pessimist would see these as signs of underlying weakness in the market and a reason to be cautious. An optimist would see these as an opportunity for some of the strongest names in the market to play catch up. A realist would see it as both and mitigate risk more aggressively while taking bullish trades to the upside.  

 SMH