The Fed vs. Main Street

The Fed vs. Main Street

The past two months has been a showdown between the real economy vs the Fed.

Skyrocketing unemployment, plummeting industrial production, retail sales and GDP vs a $7 trillion balance sheet.

So far, the Fed is winning. Are there any good reasons to expect that will change in the near term?

Look at the Nasdaq, which has been leading the market. It’s up +7.65% YTD and is only 3.7% below it’s all time high.

Chart showing the Nasdaq is near all time highs
The Nasdaq is near all time highs

Then we have the S&P 500, which has been consolidating for over a month. The S&P remains just below its 200 day moving average AND the key 3000 “round number” level. The 200 day moving average is widely regarded as the line in the sand between a bull market and a bear market, and this is a level every technician in the world will be watching.

S&P 500 is just under they key 3000 level and it's 200 day moving average
The S&P 500 is consolidating just below its 200 day moving average

Bringing up the rear is the Russell 2000, which remains 21% off it’s all-time high. The Russell – which comprises small and mid cap #stocks – is probably the most representative of Main St.

The Russell 2000 remains in bear market territory
The Russell 2000 remains in bear market territory

The question now, as we head into a 3-day weekend, is who’s going to feel the most nervous? The longs or the shorts?

My positioning remains quite light but I am net long. I own some puts in IYT as a hedge, but I will be putting on some cheap hedges in SPY to bring me to a more neutral exposure over the weekend. We have a low put/call ratio which indicates complacency – “everybody’s long”. A pullback could come at any time and I feel it’s prudent to have some hedges in place.

Once we come into next week, it makes sense to me that the S&P will want to at least test the 200 day MA (and the 3000 level).

If we get a solid close above this level we could see a resurgence of buying. If however we see a rejection at this level, that would open the door to a interesting move to the downside.

I wish you good trading trading and a great weekend!