Market Mayhem: The Fed’s Gamble and a Historic Slide

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It wasn’t just a bad day for the markets—it was a horrible day. Deep down, we all knew the markets had gone too far, and so did the Fed. While I was long, I didn’t stay long, but in hindsight, I should have been saying, “Sell—sell the hell out of it!” I told the PitBull just before Powell spoke that there was no way the Fed could keep lowering rates.

The problem with the Fed is they can’t admit they were wrong. Instead, Powell said it was a “close call,” but the decision was the right one. Powell also stated that from here, it’s a new phase, and the Fed is going to be more cautious about further cuts. Personally, I’ve lost total faith in the Fed. They went too far raising rates, and then they continued to lower them even while the data showed higher inflation. What Powell should have said is, that they would keep rates steady until the data improves.

The yield on the 10-year note was already high, but it jumped 12 basis points to 4.504%, and the 2-year yield climbed 10 basis points to 4.385%. The Fed had to know the ramifications of the cut, but they did it anyway.

The Dow was already down nine days in a row, but after yesterday’s 1,100-point drop (marking the tenth consecutive losing day), it lost 2.6%—the worst losing streak in 50 years. The ES fell 3%, and the NQ dropped 3.6%, while the dollar surged to its highest level in more than two years.

I feel bad about this. There have been times in the past when I called the markets going down and yet I was still long. I knew the bulls were overly complacent, and I knew the Fed may have gotten ahead of itself with rate cuts. Instead of being short, though, I was long.

We have five numbers coming out this morning. I know this sounds crazy, but when the ES closes at a big discount, it usually bounces. Maybe some of the numbers will push things around, but I want to point something out: the YMH2025 hit its high at 45,642, and yesterday’s low was 42,641. That’s a 3,001-point drop in just 10 days.

Our lean: I want to buy into early weakness and sell the rallies. I wouldn’t be surprised to see a few days of rally before the market heads back down.

From Stock Traders Almanac:

Fed Grinches Spoil December Quarterly Options Expiration Bullishness, Again

Over the long-term, the week of December quarterly options expiration and the week after have the most bullish record of all quarterly option expirations (page 108, 2025 Stock Trader’s Almanac). Since 1982, DJIA has advanced 31 times during December’s quarterly options expiration week with an average gain of 0.52%. S&P 500 has a similar, although slightly softer record. 

However, the record is not pristine, and consistent strength appears to be fading. In 2022 NASDAQ’s bear market was nearing its end and typical holiday cheer was dampened. In 2021, accelerating inflation metrics triggered concerns the Fed was behind the curve with monetary policy. In 2018, DJIA and S&P 500 suffered their worst weekly loss as the Fed remained hawkish and determined to raise interest rates even as economic growth was slowing and Treasury bond yields were falling. In 2011, Europe’s debt crisis derailed the market. In 2012, the threat of going over the fiscal cliff triggered a nearly 2% loss the week after.

Although DJIA and S&P 500 performance has waned during quarterly option expiration since 2008, performance during the week after has remained solidly bullish. The Fed may have played the part of the Grinch this week, but next week has a stronger recent track record of consistent

MiM and Daily Recap

The ES traded a decent range in Globex, moving from 6113.50 up to 6147.25, and opened at 6124. After the open, some buying pushed the market up to the regular session high of the day, which proved to be a false breakout at 6148, reached at 10:49 a.m. From there, the market traded sideways and slightly downward heading into the Fed announcement and press conference.

At 2:00 p.m., hawkish language from Powell triggered immediate and significant selling. The ES dropped from the 6136.75 high to a low of 6116.50 on the initial reaction. A quick two-minute pullback to 6127.50 was followed by strong selling, breaking the day’s earlier low and driving the market down to a new low of 6079.75 by 2:18 p.m.

A brief pause and a pullback up to 6096.50 at 2:25 p.m. quickly gave way to another wave of selling, with the ES reaching 6071.25 by 2:30 p.m. Another short rally to 6091.75 at 2:34 p.m. was met with all-out selling over the next 50 minutes. During this time, all 5- or 6-point rallies were sold, driving the ES down to 6018.50 at 3:17 p.m.

From here, some short-covering led to a 20-point rally back up to 6037.75 in a swift four-minute push. However, this rally was followed by a measured move of panic selling, which sent the ES tumbling all the way down to 5940 by 3:45 p.m., likely driven by margin calls and anticipation of the Imbalances.

At 3:50 p.m., the MIM (Imbalance Meter) revealed -4.38 billion to sell. Despite a brief reaction to the upside, where the ES printed 5983.75 at 3:54 p.m., the 3:55 p.m. MIM update showed sell imbalances growing to -6.62 billion. This increase drove the market back down to the session low on the cash close at 5939.50. Post-market trading saw further selling, printing down to 5906.50 before shorts covered again, with the ES settling at 5939.50, down 186.25 points (-3.04%).

The NQ also experienced significant declines, settling at 21,459.50, down 845.25 points (-3.79%). Heavy volume accompanied the moves, with the ES trading 2.532 million contracts and the NQ trading 723,000 contracts.

How to read the MIM

Technical Edge

Fair Values for December 19, 2024

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Guest Posts:

Dan @ GTC Traders

“Check” … 2024

In the beginning of 2024, we had stated that we were approaching the year to play our position sizing and programs in a very conservative manner.

We were not looking for huge gains. We were not looking for impressive double digit returns. Or ‘big hands’.

As Matt Damon’s character, Mike McDermott told “Teddy KGB” in the movie “Rounders” around the ol’ Poker Table?

Check.

Conservative. We were looking for linearity of returns over absolute returns. As we have said in other entries? We are not sure when ‘the reckoning’ will come (and today was not that … more on that later), but it will eventually come. As it always does. And our mandate quantitatively switches us over to this approach in such environments.

Check.

And it’s worked. We’ve had such a linear year. Not fantastic. But a good year. Positive. We made money, and beat the Risk-Free Rate. Exactly what we were looking to do.

The Equity Income Hybrid Core? We’ve enjoyed income approaching 4% yield on cost. The Valuation Book? Not one down month for the year, and that side of the portfolio is currently at 7.31% for the year and climbing higher …

I’m not sure how much more ‘linear’ we could achieve than the above.

The short-term trading side of the portfolio is doing even better. This month? We’re up a few basis points, while the S&P 500 sunk -2.95% today, and is down -2.66% for the month of December.

Great.

What now?

We believe the Fed continues down a path of extreme error. We don’t need to be hearing about a path of ‘pauses’ on interest rate cuts. Or even discussing any interest rate cuts. Interest Rates are already too low. We are now more than three years from the causes of the initial inflationary push of 2021 … and 12 month CPI is beginning to head higher; following Core and Sticky Inflation. Again we ask the question … what now?

Honestly? For equities it wasn’t that big of a down day on a percentile basis. It’s not. In the Long- Short Valuation side of the book? Or for the Equity Income Hybrid book? We’d would only call Wednesday’s move the first push down.

Now it’s time to see what comes of this first push. Do we rebound as we often do, and discussed on Wednesday morning? It’s probable. It’s rare that a market will sell-off, and continue to dive lower with no letup. Let’s wait and see what the market delivers. Wednesday was may have only been a knee-jerk reaction. So we will wait before establishing a short position on the indices in the long- short valuation book, or establishing a hedge in the Equities Fixed Income Hybrid Core portion of the Portfolio.

What is most interesting about today? Are interest rates. As you know by now, we have been heavily monitoring SR3H2026. Today, we slid lower through the lower structure we have been monitoring, to higher interest rates …

So what now? As we said in our X / Twitter stream… this months Inflation data and next two months should be considered ‘one print’, and a read of this as a conglomerate ‘read’ of inflation. Which should tell us who is wrong.

Is the Fed wrong? Or is it the Rates market?

Our money is that the Fed is who is wrong. Time will tell. Until next time, stay safe … and trade well.

Trading Room News:

Polaris Trading Group Summary: Wednesday, December 18, 2024

Morning Session:

Midday Observations:

FOMC Reaction (Afternoon):

Key Trades and Lessons:

Closing Insights:

Overall Reflection:
The day presented challenges with FOMC-driven volatility, but strategic trade setups early on and critical analysis of sentiment shifts provided opportunities for learning and refinement. David’s reminders about discipline and order compliance were timely and insightful for all participants.

DTG Room Preview – December 19, 2024

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Disclaimer: Charts and analysis are for discussion and education purposes only. I am not a financial advisor, do not give financial advice and am not recommending the buying or selling of any security.

Remember: Not all setups will trigger. Not all setups will be profitable. Not all setups should be taken. These are simply the setups that I have put together for years on my own and what I watch as part of my own “game plan” coming into each day. Good luck!