I Fought The Fed...And I Won

Elliot Wave Technical Analyst & author @ Elliott Wave Trader
June 30, 2020

The general market reliance on the Fed is not only what is driving many investor’s decisions of late, but it will likely reach its peak in the coming years. But, one is going to have be very careful before they buy into this fallacy too deeply.

I am told over and over again that one cannot fight the Fed. Unfortunately, history does not support this proposition. Allow me to begin with the events surrounding the Great Depression, and the Fed’s inability to stem that tide:

“The Federal Reserve System, from February to December 1931, increased the issue of Federal Reserve notes by 80%. These issues were due to bank failures which made necessary a larger use of cash. Yet, after a wave of bank failures . . . both banks and their depositors began raiding each other in a cut-throat competition which more than defeated the new issues of Federal Reserve notes.” Irving Fisher, Booms and Depressions, 1932

Now, if you think that the Fed has done any better since, let’s consider the most recent “crashes” we have seen in our financial markets. As I have outlined in past articles:

In fact, the following instances are just some of the highlights of volatility since the supposed inception of the Plunge Protection Team:

  • February of 2001: Equity markets declined of 22% within seven weeks;
  • September of 2001: Equity markets declined 17% within three weeks;
  • July of 2002: Equity markets declined 22% within three weeks;
  • September of 2008: Equity markets declined 12% within one week;
  • October of 2008: Equity markets declined 30% within two weeks;
  • November of 2008: Equity markets declined 25% within three weeks;
  • February of 2009: Equity markets declined 23% within three weeks.
  • May of 2010: Equity markets experienced a "Flash Crash." Specifically, the market started out the day down over 30 points in the S&P500 and proceeded to lose another 70 points within minutes. That is a loss of 9% in one day, but the market did manage to close down only 3.1% in one day!
  • July of 2011: Equity markets declined 18% within two weeks
  • August 2015: Equity markets decline 11% within one week
  • January 2016: Equity markets decline 13% within three weeks
  • January 2018: Equity market decline 16% within three weeks
  • October 2018: Equity market decline 12% within three weeks
  • December 2018: Equity market declines 13% within 3 weeks
  • February 2020: Equity market declines 35% within 4 weeks

Based upon these facts, you can even argue that significant stock market "plunges" have become more common events since the advent of the Plunge Protection Team, especially since we have experienced more significant "plunges" within the 20 years after the supposed creation of the "Team" than in the 20 year period before.

In fact, in prior articles, I even outlined how central banks have clearly been unable to control their own currencies, as I have noted the US and China currencies as recent examples.

Additionally, back in 2015, when the Fed began pulling away from the markets, most investors were certain the market was going to crash. Yet, the market continued to rally another 60% while the Fed was reducing its balance sheet.

Most investors do not focus on these facts. Yet, they are clear and incontrovertible. They only remember how the market went up after a Fed action while ignoring all the “crashes” we have seen while the Fed has been unable to prevent them, despite their attempts. And, we are doing the same today.

Almost everyone is certain that the only reason the market rallied in the face of all the bad news we heard during April through June was because of the Fed. Yet, they conveniently do not recall the recent Fed action attempting to stop the 35% market crash, as you can see from this chart:

If you look at this chart from a dispassionate perspective, one can even claim the Fed “caused” the downside extensions within the decline, as each time the market bounced and the Fed attempted to act, the market dropped precipitously right after the Fed action.

If you do not believe the history regarding the Fed’s ability to support the market or your lying eyes based upon the charts, how about if you hear it from the “Maestro” himself:

“The cause of economic despair, however, is human nature’s propensity to sway from fear to euphoria and back, a condition that no economic paradigm has proved capable of suppressing without severe hardship. Regulation, the alleged effective solution to today’s crisis, has never been able to eliminate history’s crises.” Alan Greenspan - Financial Times - 2008

“It's only when the markets are perceived to have exhausted themselves on the downside that they turn.” – Alan Greenspan - ABC interview - December 2007

You see, even Alan Greenspan has learned to recognize what I have been saying for many years in my articles on Seeking Alpha. At the end of the day, it is the general market sentiment which directs and controls the market action, and not some invisible hand that so many want to believe due to their need to understand the market based upon their desperate desire for “control.”

But, my friends, such control is an illusion. Yet, almost all investors have a deep seeded need to be able to explain the market based upon various fallacies simply because the alternative is too distasteful for them to believe or even tolerate.

As Ben Franklin was quoted as saying:

“Geese are but Geese tho’ we may think ‘em Swans; and Truth will be Truth tho’ it sometimes prove mortifying and distasteful.”

This brings me to the point of the title of this article. Back in November of 2018, when the Fed was into a rate hiking phase, we identified the strong potential for the bond market to bottom out and begin a large rally despite the Fed's actions. Many told me that I was nuts for even considering something so foolish. Yet, I told the subscribers of ElliottWaveTrader.net that I was going long TLT back in November 2018 when we hit my downside target in the 112-113 region in TLT. Yes, we fought the Fed in November of 2018, and by the looks of the bond market since that time, we clearly won.

And, again, in January and February of 2020, I outlined to my subscribers that I was shorting EEM, and provided clear parameters for that short trade, along with the downside target, as you can see from the public article I wrote and the chart included in the article: Sentiment Speaks: Emerging Markets Look Sick.

Please take note that there was nothing about this trade which said that I will change my perspective if the Fed begins to act. The target and expectation remained the same the entire time, even though the Fed attempted to act several times to support the market throughout this 35% decline.

Yet, some readers on Seeking Alpha have taken me to task for not shorting the SPX, and using EEM as my trading proxy. So, I want to explain exactly why I did what I did.

You see, I look for the best opportunities with the lowest risk, based upon all the charts I review. And, while the SPX was breaking out to new all-time highs, EEM was clearly in a corrective structure, as were some other index charts. I was constantly highlighting this non-confirmation to the members of ElliottWaveTrader.net while suggesting extreme caution in the equity market. And, when EEM provided me with a low-risk shorting opportunity with clearly defined parameters (much more so than the SPX or the other index charts), I made the EEM my trade of choice for that short trade.

So, again, even though the Fed was desperately trying to support the market during that 35% decline, not only did EEM hit my downside target outlined well before the decline even began, but it even slightly exceeded it before it turned back up quite strongly. Again, Fed action had no bearing on the market attaining the targets which we clearly set well before the decline began.

At the end of the day, the common and general reliance upon the Fed’s ability to support the market will likely be the undoing of many in the coming years.

While I still believe we have several years left before we complete this bull market move off the lows struck in 2009, I think over-reliance upon the Fed will not only keep many fully invested in the market as we approach that long term top I expect in a few years, but the Fed’s action will likely keep many invested during the decline that follows, which will likely be of a greater magnitude than the one experienced in February and March of 2020.

And, just like the Fed was unable to prevent that decline, it will be unable to prevent the greater wealth destruction I expect to be seen after we strike our long-term top.

So, you have to ask yourself one question: Do you have what it takes to fight the Fed to protect yourself and your wealth when the time arrives?


Avi Gilburt is a widely followed Elliott Wave technical analyst and author of ElliottWaveTrader.net, a live Trading Room featuring his intraday market analysis (including emini S&P500, metals, oil, USD & VXX), interactive member-analyst forum, and detailed library of Elliott Wave education. You can contact Avi at: [email protected].

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