Will the Fed Break the Stock Market?! This is What Ilya Spivak is Trading

Key Concepts

• Macro Divergence: The disconnect between equity market performance (S&P 500) and other asset classes (Bonds, Gold, Oil, USD).
• Event Risk: The upcoming Federal Reserve policy announcement and major tech earnings reports.
• Inflationary Impetus: Rising core inflation in goods, services, and housing, compounded by energy shocks.
• Reaction Function: The Fed’s willingness (or lack thereof) to provide policy support/bailouts during market volatility.
• Market Sentiment: The use of volume and momentum indicators (RSI) to gauge the conviction behind price movements.

1. Market Analysis and Price Action

The speaker highlights a significant lack of conviction in the current equity market rally.

• S&P 500 (ES Futures): Despite reaching record highs, the rally is characterized by "fading volumes." The speaker notes that the recent move up had the lowest volume since Easter Monday, while downward moves show higher participation.
• Momentum Divergence: The Relative Strength Index (RSI) is failing to confirm new price highs, suggesting a loss of momentum that could signal either a period of consolidation or a market top.
• Asset Class Disconnect: While stocks have erased the losses from the Iran war, other assets remain in a "wartime" state:
  • Crude Oil: Trading ~35% higher than pre-war levels.
  • Bonds: Yields are creeping higher as the market prices out rate cuts.
  • Gold & USD: Both are showing signs of strength/resilience, consistent with a higher-rate, risk-averse environment.
  • Bitcoin: Currently acting as an outlier, seemingly driven by sentiment rather than the broader macro pressures affecting traditional assets.

2. Federal Reserve Policy and Economic Outlook

The Fed is currently in a "wait and see" mode, but the data suggests a shift toward a more hawkish stance.

• Structural Inflation: The Fed’s previous hope that goods inflation (driven by tariffs) would be a "one-off" event has not materialized. Data shows a resurgence in goods, services, and housing inflation.
• Summary of Economic Projections (SEP): The Fed has upgraded growth and inflation expectations, pointing toward a "longer-term higher rate" environment.
• Policy Expectations: Fed funds futures indicate an ~80% probability that rates will remain at current levels, with no rate cuts expected until at least October of the following year.
• The "Insurance" Argument: The speaker argues that the market’s primary concern is not just the timing of rate cuts, but whether the Fed will act as a "backstop" or "bailout" mechanism if market conditions deteriorate. If the Fed maintains a high bar for intervention, markets may be left to navigate volatility on their own.

3. Methodologies and Indicators

• Volume Analysis: Used to determine the "conviction" behind price moves. Low-volume rallies are viewed as suspect.
• RSI (Relative Strength Index): Utilized as a momentum indicator to identify when price action is not supported by underlying strength.
• Break-even Inflation Rates: Used to track inflation expectations baked into Treasury bonds, which are currently surging.
• PMI Data: Composite PMI for manufacturing and services is used to identify inflationary pressures in the real economy.

4. Strategic Positioning

The speaker maintains a bearish outlook on risk assets and a bullish outlook on rates/dollar:

• Short Positions: Short Gold, Short Risk (S&P 500 and NASDAQ via put verticals), and Short Russell 2000 (via selling calls to achieve a 1:1 risk-reward ratio).
• Long Positions: Long US Dollar and Long Bitcoin (as a potential uncorrelated hedge, though with caution regarding sentiment shifts).
• Bond Strategy: Short the long end of the curve (TLT put verticals) to capitalize on the "higher for longer" interest rate environment.

5. Notable Quotes

• "The price action is what relays the macro story... the markets will reveal themselves in how they move."
• "The Fed sees a hotter economy... they are concerned about core inflation because it’s there that we’re not really seeing the kind of move lower that we want to see."

Synthesis/Conclusion

The market is currently in a state of "meandering" uncertainty, waiting for the Fed and tech earnings to provide direction. The primary takeaway is the growing divergence between the S&P 500’s "melt-up" and the reality of persistent, structural inflation and a hawkish Fed. The speaker warns that if the Fed signals a reluctance to provide policy support, the current equity rally—which lacks volume conviction—is highly vulnerable to a correction.