Don’t Fight The Fed, Don’t Fight The Tape – Still Appropriate?

Successful traders typically respect the adage “Don’t fight the Fed, don’t fight the tape”. Right now, neither appears to be something to tussle with. 

The Federal Reserve has slowed the unprecedented pace of monetary expansion that peaked in June, but the balance sheet has grown at a roughly 10% annualized pace from a trough after a brief decline in July. By any normal standard, that would be an aggressive pace of monetary expansion. That is a Fed that you don’t want to fight.

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Meanwhile, I have neither the space nor the inclination to outline all the stocks and indices at or near record highs. While there have been stumbles along the way, even the worst plunge proved to be temporary, and ultimately a buying opportunity. The public has embraced equities with a fervor, and investors have become further enamored with bullish call options that allow leveraged exposure to the seemingly perpetual upside of their favorite shares. That is a tape that you don’t want to fight.

With all seeming so rosy, it seems appropriate that I should stop writing now. It would give us both more time to go out there and buy more stocks, foreign currencies, bitcoins or any of the various investable items that have been making money for bullish traders. But I have more to say. Another adage that traders respect is “be greedy when others are fearful and be fearful when others are greedy”. Is there any dispute that others are greedy right now?

When I wrote earlier that the public has become enamored with stocks, I stopped short of using the phrase “in an unprecedented manner”. This is in spite of sentiment indicators that are at or near their own recent or all-time highs.  In a recent piece, I outlined some of the parallels that remind me of the heady days of the 1999 internet bubble. Then as now, we saw an accommodative Fed and technological improvements that gave investors unprecedented access to markets. I don’t imagine that anyone reading this was around during the Roaring ‘20s (1920’s, that is), but its stock market rally was heavily abetted by excessive margin levels that left investors dangerously exposed to a decline. 

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Disclosure: MARGIN TRADING

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