It’s been a fascinating downturn since last Thursday, February 2. 

Remember last week? Everyone sat in the room saying that the Federal Reserve failed to send a message to the market. 

Remember when they ignored Fed Chair Jerome Powell’s relatively hawkish tone or the fact that Minneapolis Fed Bank President Neel Kashkari’s statements that we might need to move to 5.4% this year?

Well, Powell did send a message to the market. You just missed it.

Under Pressure

When we look for the possibility of a selloff, we always start when the market is euphoric. Last week, the entire narrative centered around soft landings, Fed pivots, and missing a recession. 

The narrative is shifting. But not for any of these reasons. 

As you can see in the chart below, the Relative Strength Index (RSI) on the daily chart peaked at last Thursday’s trading session. The same appears to have occurred with the Money Flow Index (MFI) as well.

The MACD looks ready to turn, and the ADX’s strength trend seems to be weakening. This is all a sign of money leaving the markets – and the possibility of a HUGE shift in short-term market sentiment (or profit-taking.)

I don’t find it coincidental that last Thursday was the short-term top. 

As I noted the other day, the Federal Reserve started a full-court press. 

And while everyone said that Powell didn’t signal a hard enough move on rates and this rally, the Fed quietly engaged in a sneak attack that may have stopped this rally in its tracks. 

The Fed cut its balance sheet by $38 billion last week. 

$38 billion.

Understanding the Fed’s Balance Sheet

Each week, the Federal Reserve conducts Open Market Operations on its balance sheet. Sometimes it buys bonds. Other times it sells them. 

But for the last year, the Fed has been enduring a process known as Quantitative Tightening. That consists not just of raising interest rates (which is the only thing that seems to be on people’s minds.)

It also consists of cutting the balance sheet. 

Here’s the System Open Market Account (SOMA) report for last week. As you can see, the Fed owns about $7.9 trillion on its balance sheet.

And all of that liquidity the Fed has provided to the markets over the last decade has found its way into the equity, housing, and bond markets. 

But now, the Fed is cutting its balance sheet. It’s selling assets and reducing liquidity in the system. Last week, the Fed drained $38 billion from the system – while everyone was celebrating “peak rates.”

This was a mistake. 

There is a direct causal relationship between the Fed’s balance sheet (and the balance sheets of the Bank of Japan and European Central Bank) and the S&P 500. 

Drain capital from the system, and you’ll hit stocks.

The Fed plans to cut $1 trillion from its balance sheet this year. Do the math and consider what this can do to risk assets and P/E ratios. The academic evidence is rather compelling. 

The Fed will release its SOMA report today at 4:30pm, and based on the way that the market is reacting, it feels like Mr. Powell is still sending a message. 

I have a feeling that my relative momentum indicator will flash VERY soon. We’re already at yellow, and this market could take a big hit if the selling continues. 

To your wealth,


Garrett Baldwin

Market Momentum is Yellow

Buying momentum is plunging and we’re about to go Yellow on Momentum. This market is now facing significant short-term pressure from overbought conditions last week. Now is the time to start playing some defense in a long-term portfolio or look for the best ways to trade negative momentum if the market does begin to tank. I’ve covered you over at Tactical Wealth Investor, where I give away a free copy of “How to Trade Negative Momentum.” This is the most important report you can read all year.

The AXS Short Innovation Daily ETF (SARK) – an inverse fund that bets against the stocks of Cathie Wood and her broken fundamental stocks – is off more than 28.5% to start the year. 

Fed Chair Jerome Powell spoke at 2:30 pm yesterday, and in a period of roughly 11 minutes, the S&P 500 ETF (SPY) surged from 402 to 410.

The S&P 500 surged through its critical support level of 4,010.

Where did this rally originate?

The answer lies within the Fed. And it goes all the way back to January 3, just a few days before momentum turned green and this rally accelerated. 

It’s a reminder that trading momentum without emotion is your best path forward.

Origins of a Fed Mistake

During the Fed’s December meeting, central bank officials realized they had a problem. Financial conditions had started to expand back in October. 

According to the Chicago National Financial Conditions Index, investors were taking more risk, credit was increasing, and leverage was picking back up from the October bottom. 

Here’s a chart from Bloomberg.

Minutes released on Wednesday, January 4, revealed concerns that the markets were pricing in disinflation too quickly. Fed officials said they were very worried that they couldn’t stop inflation if financial conditions kept expanding. They need higher interest rates to cool inflation through higher rates and or lowering stock prices. 

Here’s the Wall Street Journal on January 4: “‘An unwarranted easing in financial conditions, especially if driven by a misperception by the public of’ how the Fed will react to economic developments ‘would complicate the committee’s effort to restore price stability,’ said minutes of the Fed’s Dec. 13-14 meeting.”

The reality is that financial conditions are expanding. They’ve been doing so for months. This is especially dangerous because we’re back in a position where liquidity is driving the markets and finding their way into riskier assets. 

Powell Deflects the Most Important Question

Yesterday, Powell received a chance to address the expanding financial conditions head-on during the question and answer session. When confronted on the issue of expanding financial conditions – the very issue that plagued the Fed during its December meeting – he punted. 

Powell said that he won’t comment on short-term financial conditions in the economy. That was all that traders needed to hear. Despite the eighth straight hike on interest rates – and signs of more to come – the market took the shorts to the woodshed. 

Traders bid up Treasuries, corporate bonds and crypto. It was an onslaught of bids to the most heavily shorted stock. Carvana (CVNA) – a company that should be heading to bankruptcy court – has now seen its shares rally more than 100% on the year. In fact, shares popped another 22% overnight, after another 33% rally yesterday.

Meanwhile, nearly every signal in our economy is telling us that a recession is coming. Our manufacturing numbers are dismal. Our housing market is under strain. The bond markets remain inverted and waiting for a move lower. 

The disconnect between our market and our economy is broken. 

As I noted during our Roundtable session yesterday, liquidity is what matters. These financial conditions may quickly revert at any time, perhaps in the third quarter and once we have the Debt Ceiling resolved. 

For now, the Fed seems to have lost control to stop asset price inflation – and that sets up for a very difficult next few months for logic to reign in these markets. 

Financial conditions are expanding at the fastest pace since 2020, back when the YOLO trade ruled, and Meme stocks defied our imagination. For now, I encourage traders to focus on trading companies with strong annual earnings growth and price momentum. This will be a very unusual month. 

Stay cautious, use stops, but remember that “Up is Down and Left is Shoe” for now. 

Enjoy your day,

Garrett Baldwin

P.S. Please let me know if you have any feedback, questions about today’s issue or anything else. Just email us at hubfeedback@wealthpress.com.

*This is for informational and educational purposes only. There is an inherent risk in trading, so trade at your own risk. 

Market Momentum is Green

Fed Chair Jerome Powell looked defeated as the risk-trade just shot through the key support levels. We now have a clear path toward 4,300 after the Fed effectively lost control of financial conditions in this economy. I believe this is setting up for a huge short opportunity on the horizon. However, the rally will need to sucker a lot of people back into this market and shorts will need to admit defeat for now.