An interesting piece was published as part of an interview on CNBC by Mohamed El-Erian who says that the Fed failed to communicate to the markets properly. The new signals coming out of the Fed suggests that it is trying to break the “co-dependence” on the central bank, according to Mr El-Erian.
The theme of this piece points to the view that Mr El-Erian feels that Fed Chair Powell would probably react to the market sell-off by saying, “It is about time that the markets stand on their own two feet.” The market now reads the hike cycle by the Fed as not slowing down as once thought. Despite the criticism from President Trump, the Fed wants to dispel any feeling that the Fed is a friend of the market and this of course implies that the market must trade on its own merits. The market rout continued on Friday by falling over 400 points – the Dow Jones – in what turned out to be the worst week since 2008. The Dow, the Nasdaq and the S&P 500 are all down between 18 and 20 percent from their highs in July and August of 2018.
As the Fed continues to hike rates and shrink its balance sheet, which was 4.5 trillion dollars at its largest position, the equity market continues to fall apart, with shockingly aggressive selling that has damaged traders and investors in November and December, with no signs of the downside ending, at least for now. We think that covering part of shorts between 21,500 and 21,200 in the Dow makes sense. More on this later.