'Don't Fight the Fed' Is Advice That Works in Both Directions

The single best piece of market advice since the bear market and recession of 2008-2009 has been "don't fight the Fed." If you heeded that advice and stayed long, then you have been on the correct side of the action for the last 12 years.

During this period there have been a few "taper tantrums" and a few concerns that the Fed was going to be less dovish, but it didn't last long and the market was soon back on track.

Fed dovishness went to an even greater level in the battle against COVID and the economic fallout. There is little question that the trillions of dollars that the Fed threw at the economy helped to ease the COVID crisis, but there were many unattended consequences as well. One of these consequences was that a huge amount of the liquidity that was created flowed into the stock market and into the biggest and most liquid of the mega-caps. With interest rates near zero there wasn't much risk in equities, so they were continually bid up.

For years the bears have been predicting that the easy Fed was going to produce inflation. Back in 2010-2011 there was a chorus of bears predicting that interest rates were about to fly higher. Some even said that rates were at a generational low.

That proved to be wildly incorrect, but those inflation fears suddenly are now becoming real. The combination of supply chain issues and the massive Fed liquidity is pressuring bonds and pushing up rates.

On Wednesday, the market was surprised by the hawkishness of the Fed that was apparent in the minutes of its last meeting. There was a tacit acknowledgment that it is behind the curve and may need to raise rates more aggressively than anticipated. The Fed's pattern for years has been incrementalism, and now there is about an 80% chance of a rate hike in March, with maybe even more hikes likely to follow quickly.

Not fighting the Fed when it was dovish was great advice, and many market players now are thinking that they might want to fight the Fed when it is hawking. The news Wednesday created drastic corrective action in big-caps and the FATMAAN names for the first time in a while. Many of the big-caps are barely off their recent highs, so they are vulnerable, and that is making market participants nervous.

The great dilemma of this market is that there is such a wide gulf between the liquid mega-caps that have benefited the most from the Fed's infusions of liquidity and thousands of other stocks that have been in deep corrections and bear markets since February 2021.

Currently, all these badly battered names that are already near 12-month lows are not able to find good support. They are being pushed even lower as market players dump everything regardless of valuation or merit.

This is a market driven by macro flows right now, and that means stock picking just doesn't add much value. Eventually that will change and the best stocks will attract interest, but right now there just isn't a reason to expect that fundamental buyers are going to build up big new positions.

For traders, the good news is that the intensity of the selling is a good setup for some sort of snapback rally. The biggest bounces always occur in the worst markets, and there is no question this is a pretty poor environment right now.

There are many stocks that I think are tremendous values and will eventually be recognized, but right now we can't fight a hawkish Fed.

At the time of publication, Rev Shark had no positions in the stocks mentioned.