🍔Don't Miss the Next Dip

After Wednesday's crash, here's three clues to time the dip buy

What a week it’s been! The Mag 7 pullback we’ve been calling for for several weeks finally happened. Unfortunately for us, the entire market sold off with them in a sharp rejection of the FOMC decision. Here’s what we wrote previously:

“In terms of flows, US equities have received an astounding $140B of inflows since the election. While we think this is directionally correct, it has moved up very far very fast. It is susceptible to a negative news catalyst triggering a quick reversal of these positions.”

-From “Deny, Defend, Depose”, Dec 8 2024

We also called out gamma and breadth dynamics that portended the pullback. But we certainly weren't expecting a full blown meltdown during what was supposed to be Santa Clause week. In this post we'll talk about what caused the selloff and what’s likely to happen next.

FOMC triggered the selloff

It started with Wednesday’s FOMC meeting where the Fed cut 25bps as widely expected. However, the real surprise came from their projections, which was very hawkish: Instead of 4 cuts for next year, they’re now down to 2 cuts. Powell also revealed this week’s cut was a "close call", meaning they considered pausing. One dissenter even called for no cuts.

That’s a big deal! Apparently, some members were taking into account potential inflationary effects of Trump’s fiscal policy. This is a complete 180 from their data-dependence stance, and contradicts comments made just last week. It suggests they are once again prioritizing disinflation over growth. They also see long-run interest rate a touch higher at 3% (prior to this, Fed members were already hinting at lifting the neutral rate).

In light of this news, SPX promptly sold off…

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The rest of this article is for paid subscribers. You don’t want to miss this week’s topics:

• Suppressed volatility was the tinder

• What happens next

• Portfolio changes

• Is the small cap thesis broken?

Start timing the market today!