Fed Cut...Now What?

A few weeks ago, in my subscriber-only newsletter, I posted a few charts and highlighted an analysis from renowned investor Ken Fisher that suggested the Federal Reserve actions don't matter much regarding stock prices.

Here is one of those charts for reference. As the chart shows, stocks have rallied sharply despite a historic increase in interest rates.

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Since then, the Federal Reserve has reversed policy and cut rates. So now what?

There's an old saying, "Don't fight the Fed".

I first became interested in the stock market during the crash of 1987. I was twelve years old.

My Mom refused to buy cable television. Armed with rabbit ears and tinfoil, I grew up with PBS.

I learned to cook from Julia Child, to paint from Bob Ross, and to understand the stock market from Louis Rukeyser on Wall Street Week.

Martin Zweig was one of the regular "Elves" on Wall Street Week and my favorite guest.

Mr. Zweig had a look of perpetual worry on his face. He looked constipated, as if he were sitting on a toilet trying to squeeze out a turd for the last 30 minutes.

Uncomfortable looking, yes! Undoubtedly successful, though. His Zweig-Dimenna hedge fund was one of the best-performing partnerships of all time.

Zweig, who sadly is no longer with us, was data-oriented. He wrote a great book called Winning on Wall Street, which included numerous strategies supported by hard data.

One of his mantras was, "Don't fight the Fed." And Zweig's conclusion was backed up with reams of data.

Generally, the Federal Reserve does not cut rates at one meeting and raises them at the next. Instead, it looks something like this:

Raise, raise, raise, pause for a while, cut, cut, cut.

There's an obvious pattern, and trends form. This is how I first discovered the use of trends to profit from market movements.

Data from the 1940s to the 1980s supported the idea of not fighting the Federal Reserve.

But things change.

I always say markets change, but human nature does not.

The market has changed here. Ken Fisher showed that sitting on the sidelines of this historic tightening cycle cost investors a lot in gains.

Now that the Federal Reserve is cutting, given that the Fed is accommodative, it should lead to further gains, right?

Ehhhhh…not so fast.

Here’s a fascinating chart from SentimenTrader.com I wanted to share with you.

Something has changed in the last 30+ years. The Federal Reserve cut rates only for the market to stall or, in some cases, get spanked hard. Eventually, the market trended higher, but given enough time, it always does.

Look at the last few periods of 17, 9, and 11 increases only for the market to reverse after a cut.

Stepping in front of a freight train and being whacked with a quick 25% loss hurts, no matter who you are or your net worth.

This chart tells me the Federal Reserve members are clueless. Did it take 17 rate increases to get rates to where they needed to be before cutting them?!?!?!?

Or 9 or 11?!?!

Seriously? WTF!

It’s a joke. I'm in Fisher's camp. I'd ignore the Federal Reserve chatter altogether. An entire industry has been built around talking about the Federal Reserve, parsing the speeches, and figuring out the policy's impact on the markets.

I’m ignoring it. And I think you should too.

My book Unbounded Wealth discusses how financial news can harm your physical and financial well-being. My favorite reference to CNBC comes from a short seller named Marc Cohodes. He calls CNBC the Cartoon Network, which makes me chuckle whenever I think about it, even as I write this.

Regardless of what the Federal Reserve does, the spread trades I discussed last week contain huge return opportunities.

At the other end of the spectrum, there’s always money to be made in trend following. Not every day, week, month, or year. And you never know when the big trend is coming. But the market will tell you what it thinks of the Fed's moves. And that’s more important than what you think of the Fed’s moves.

Next week, I'll look at one market in particular that has 100%+ upside even if U.S. stocks languish from here for a bit.

See you then!

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