Was today the Yellen Fed's Irrational Exuberance moment?

It started off so well: the blistering ADP payrolls report, the highest in over two years (despite disappointing PMI and ISM reports), sent stocks soaring off the bat with the Dow jumping nearly 200 points higher, rising as high as 20,887, and the S&P knocking on the all time high 2,400 door again, and AMZN to new all tim highs, and making some wonder if the reflation trade had returned.

It was not meant to be, because while it took the market some time to digest the Fed's minutes, the FOMC delivered one of its loudest warnings to date that it was focusing not so much on inflation or employment, but was seeking to deflate what even "some members" of the FOMC agree is a stock bubble, warning that stock prices are "quite high", and warning that its forecasts face "downside risks" if "financial markets were to experience a significant correction."

From the Minutes:

"A few participants attributed the recent equity price appreciation to expectations for corporate tax cuts or to increased risk tolerance among investors rather than to expectations of stronger economic growth. Some participants viewed equity prices as quite high relative to standard valuation measures."

Then, more ominously, this:

... a number of participants remarked that recent and prospective changes in financial conditions posed upside risks to their economic projections, to the extent that financial developments provided greater stimulus to spending than currently anticipated, as well as downside risks to their economic projections if, for example, financial markets were to experience a significant correction.

It took algos a while to process what the Fed was really saying, which is why while the dollar briefly spiked to the day’s highs in kneejerk reaction to the minutes, it then surrendered all gains and then some after the minutes showed most officials backed a policy change that would begin shrinking the central bank’s balance sheet, as wellas warn explicitly about valuations. 

The weakness in the dollar meant that everyone's favorite market-influencing carry pair would likewise suffer, and after breaking out above 111, the USDJPY tumbled as low as 110.70 once again threatening the key 110 support level.

Of course, with both the dollar and USDJPY tumbling, it was gold's turn to shine and it did just that, surging virtually uninterrupted since its post-minutes kneejerk selloff.

Oil did not help, because after rising to multi-week highs this morning, WTI promptly tumbled after the DOE not only rejected yesterday's API draw report, but showed yet another record in commercial oil stocks coupled with the latest weekly increase in US crude production. The result: crude slumped back under $51, once again driving a dagger through the heart of the reflation trade.

Across the rates complex, if it was the Fed's intention to orchestrate a smooth selloff, it failed: having failed to selloff earlier in the day as RBC discussed, yields briefly spiked higher after the Minutes only to eventually grind to session lows.

As for stocks, with the most shorted universe soaring in early trading, dragging the Russell higher, this too was pummeled on all sides after the Fed's stark warning, prompting an accelerated liquidation of the most overvalued stock group, as shorts reasserted themselves.

Not even that poster child of the Fed's latest bubble, Amazon, could withstand the selling and after hitting all time highs in early trade, was aggressively sold off.

To be sure, the selloff could have been far worse if it wasn't for some aggressive buying programs, emanating perhaps from the NY Fed's arms-length market market Citadel, or some other central bank, which nonetheless was unable to prevent the day's substantial gains from becoming losses.

In fact, the sharp move lower, which wiped out more than 200 points from the DJIA, was the sharpest intraday reversal in 14 months. And yes, for those asking, the Dow Jones closed at the lows. We need to check but this may be the first time in many years the DJIA has done this Minutes day.

In short: today was a mess for the bulls, although it could have been much worse. However with the reflation trade now hobbled again, with Trump set to meet Xi perhaps unleashing another diplomatic fiasco, with payrolls looming - and after today's ADP number, Friday can only disappoint - there is a slew of downside risks on the immediate horizon, coming at a time when the Fed itself is warning that the S&P is too damn high. And in this painfully illiquid market, all that it would take is for someone big to start selling.

Of course, everyone knows that the Fed will not let stocks drop too low before it re-engages the QE4 "jawbone" machine. The only question is "how low is too low"...