The summer doldrums have ended with a bang!

What had become the most complacent and boring stretch for the market in more than a century ended with a resounding thud.  The Dow Jones Industrial average gave up close to 400 points in response to comments from a top Federal Reserve official on Friday.

Boston Fed President Eric Rosengren, who votes on the Federal Open Market Committee (FOMC) states that a “reasonable case” could be made for a rate hike. Because of the growing risk of overheating the U.S. economy and the financial markets, the following are his concerns and observations:

• Jobs market could reach or exceed full employment over the next year
• Sluggish growth in the first half of 2016 (1H16) is only temporary
• Inventory restocking to boost the second half of 2016 (2H16), resulting in growth exceeding 2%.
• Commercial real estate, particularly multi-family units is a ticking time bomb for leveraged institutions

I think he’s onto something with respect to overbuilding. However, the notion that the economy is on fire and that jobs are near full employment is nuts. I still don’t see the Fed hiking before the election - I think December is in play. That being said, there is no inflation scare. Wages are not moving fast enough and there is no velocity of money.

However, I do see this as a ham-fisted way of getting investors ready for some kind of hike in December or in 2017. The lost credibility of misinterpreting this economy is doing damage to the reputation of the Fed that is already beyond repair.

I have said the market is running ahead of historical valuation metrics.  but not so much that it is at levels that have triggered crashes. Certainly, the stock market needs corroboration from improved economic data and corporate growth on the top and bottom lines.

The irony is that we need the kind of economy the Fed is trying to say exists to put a floor into this market.   Money is not flowing through our economy because all those trillions printed out of thin air have been blocked up in banks, busy dumping their toxic debt on the Fed’s balance sheet.

Real Money Flow

The velocity of money is another way to read inflation or the lack thereof. Now, as a case in point,one person spends ten bucks buying a souvenir t-shirt on a New York City street; that vendor buys two hot dogs, and a soda then that vendor stops by a newspaper stand to pick up a magazine before catching the subway and also drops a dollar in a blind man’s cup. The cash has circulated as a small amount of money has gone a very long way.  This must happen in America on a grander scale, but it takes folks making more money and having more confidence.

Fear Signal or Buy Signal

The VIX (aka fear index) popped nearly 40% on Friday and 46% for the week. All of a sudden, the serene idyllic days of summer doldrums came to a halt.  In recent years, these spikes have turned out to be ‘buy’ signals. 

The market won’t get the actual answers it seeks until the actual FOMC gathering; until then, I am looking to buy the dip.

The key Support Dow is 18,000. If that fails to hold, the index could slip back to re-test 17,240, so leaping in could be tricky. Make no mistake; this is the kind of pullback that we look to buy unless the Fed is serious about hiking rates despite the wave of so-so economic data of late.  (Maybe the JOLTs report is the most important on Yellen’s dashboard…but that’s hard to believe.)

Today’s Session

Waiting for another member of the Fed to speak this morning as the market is looking for equilibrium from FOMC members on whether the rate hike happens sooner rather than later.   This is the time to be ready to buy.