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Fed Chair Jerome Powell spoke in Jackson Hole, Wyoming, on Friday morning to much anticipation. The markets clearly didn't like what he had to say.

Yet, I'm extremely pleased with his statement, not just because I'm net-short in this market, and not just because I moved to cash this week. But because he said what actually needed to be said.

There is a tremendous disconnect between the stock market's recent performance and the underlying expectations around earnings and inflation. Yes, inflation came down a little bit in July. And the August personal consumption number was at expectations. But we need to shake people by the shoulders. Inflation is still way above a rational level of inflation in the nation. Core CPI is nearly 6%. The Fed's target is 2%.

It will take a period of elevated interest rates - possibly 4% by the end of the year - to get us back on track. And we'll likely need to stay there to drain out excess capital and speculation.

The Fed is moving to "moderate demand" in the economy. And this market is starting to wake up a little to that reality. We're not there yet, but it did impact momentum on Friday morning.

A Chart Worth Seeing

We're in the early innings of the Fed's inflation fight. Powell and his team are doing everything they can to express the need for rate hikes and using words like "pain" instead of saying "we're heading into a recession."

Friday - more than anything - was about a change of tone. Powell noted that the Fed must act with more hikes, and that it can't loosen policy six to nine months from now. "Restoring price stability will likely require maintaining a restrictive policy stance for some time," Powell said. "The historical record cautions strongly against prematurely loosening policy."

The markets still believe that we're not in a recession. And fiscal stimulus may help support that claim. But the Fed isn't "dovish" in any capacity right now. It can't be. The PCE Index is still at a 40-year high.

I have said that I anticipated a market shock in September. But I'm starting to believe it will come a month later - in October. My reasoning centers around Europe at the moment. When the cold weather hits Europe - and the sharp uptick in electricity shuts down London pubs, there may finally be a reaction to those stock markets. If Europe's markets hold up, for now, the U.S. may as well. But I do want to point out this chart.

This chart shows that speculations around big spikes in volatility typically align with outcomes in spikes in the CBOE Volatility Index (VIX). As you can see, the black line measures the big moves in VIX dating back to 2008. The blue line is the number of calls versus puts purchased on the index. On the far right, markets seem to anticipate a dramatic move in these markets soon.

Today's Momentum Reading

Recap: Momentum is green. However, we witnessed a dramatic slowdown in volume buying over the first two hours in the market on Friday, especially in the small-cap space. I would continue to hold the line. Powell continues to say that the Fed won't move to cut rates next year, and the market simply doesn't believe him.

Three Things I'm Watching

Export woes: Secretary of Energy Jennifer Granholm sent a letter to U.S. oil refiners asking them to not export fuel products given the decline of product inventories on the East Coast. U.S. gasoline and diesel fuel inventory levels are currently 50% lower than the five-year average.

Granholm asked them to rebuild stocks (they'll need waivers from the Jones Act) and to think about not sending products abroad. I'm telling you, fuel storage is a mess in the Northeast right now. Just wait until Winter. I guarantee that the White House blames refineries for the low stocks.

More inflation: I can't go another day without finding a new inflationary story in America. Now, it's California. The state will move to ban the sale of new gas-powered automobiles by 2035. Well, that won't end well.

Have we considered the cost of electricity to power all the new electric vehicles? What about the cost of lithium, cobalt, nickel, and all of the other assets to make batteries on a global market? What about the inflationary cost of new power stations?

Game over: Despite all the rumors spreading recently, Amazon is not buying Electronic Arts (EA). Shares of EA had popped in pre-market hours on Friday, but quickly gave back gains. That said, a bid for EA from someone else in the near future is possible. This is a very important period of the year for EA, with the annual release of its popular FIFA and Madden franchises.

Hot Long Shot

There's a good reason to remain bearish here, and to do so in assets that don't generate income for investors. Gold, Bitcoin, and silver will face some challenges in the coming days and weeks.

I closed a position on Friday in the Roundhill Ball Metaverse ETF (METV) at a loss because of broad market exposure. But because this has turned over, and I'm looking out to October, I think there's a cheap trade that is worth a longshot. The METV Oct. 21, 2022, $8.00 put is under $0.20. It may be appealing to buy to open the METV Oct. 21 call for $0.20 or less.

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