Stocks Drop Sharply As The Markets Try To Break The Fed

 | May 10, 2022 12:19AM ET

The S&P 500 fell sharply on Monday, by 3.2% to close at 3,991. I know people are looking for answers and think that we must be near the lows. Unfortunately, I don’t believe that is the case.

We have been trained to buy the dip for over a decade, but we need to remember the critical difference between now and the last decade.

Over the last decade, the Fed was there to support markets. Now the Fed is on a path to drain liquidity from the market, so the Fed isn’t there to change the narrative and boost asset prices.

So yes, prices could have much further to fall because the Fed hasn’t even started to reduce its holdings.

Another thing that may be happening here is that the market is trying to find the point at which it breaks the Fed, as it has done so many times in the past.

Unfortunately, I think the Fed’s pain is not what it used to be. In the past, the Fed could cave to the market’s demands because growth was always front and center, with inflation never being an issue.

But with CPI at 8%, the Fed will not be able to cave. The market is yet to realize that the Fed’s pain point is now CPI, which means the markets are no longer the center of attention, and like any 2-year-old toddler that doesn’t get its way, it means more pain until the market breaks the Fed into giving in.

h2 S&P 500/h2

I hear a lot about the market being oversold at this moment, but I do not see it that way. The RSI on the S&P 500 daily chart is now at 33.4, which is not oversold. Meanwhile, the S&P 500 sits just a touch below its lower Bollinger® Band.

So I think there could be more downside risk to the market than people think.