Roulette Wheel Wednesday

In hindsight, the Federal Reserve meetings seldom matter. The Fed mainly tracks the bond market with interest rate changes. Rates are already moving in the direction they're going. Asset prices too. This meeting will feel more consequential though, because it could be a shock to the market. Many investors still believe the Federal Reserve will risk economic damage in exchange for higher stock prices. Another, smaller group of investors believe the Fed will hike rates because if inflation rises further, they will lose control.

The main thing the Fed has done is create uncertainty by losing credibility. It isn't clear that the Fed will choose inflation fighting over asset prices. That has put traders on hold. The price of crude oil tells me investors are hedging a dovish Fed with crude oil. If the Fed triggers a dovish reaction, they will unleash the Gods of the Copybook Headings upon the market. Traders will run crude to however high they can get it. Crude oil will be the new GameStop. On the other hand, crude is perfectly setup for a repeat of the 2014 taper implosion. Not only will there be a short taper, but the first rate hike will come right after, instead of 14 months later after the 2014 taper completed.

The other key chart is bonds. The 10-year yield looks like a giant basing pattern. Long-term treasuries (ZB in futures) has a giant topping pattern, but also a short-term inverse head and shoulders indicating it too could go either way in the weeks ahead.

Failure for the Fed is probably inevitable. Surprise with a slightly more hawkish police and get blamed for another leg lower in stocks. I think this is the best choice because it should mark a bottom for a correction. If instead they opt to placate stock investors, the result could be chaos in commodities and bonds that eventually overwhelms stocks. Stocks would likely slide at least 50 percent from the high before adjusting for double-digit CPI inflation. Given the low level of interest rates, it's possible stocks lose more like 70 percent over the next 12 to 18 months.

For myself, I have no idea what the Fed will do tomorrow. My sense is "the market" leans more sanguine than bearish, leans more towards inflationary trades like commodities. Instead of looking at the big picture, I'm looking at the smaller picture. Crude oil is my guess for the most impacted asset. I will escalate bullish energy trades if the Fed comes in dovish, and heavily short crude oil (XLE) if hawkish. Remember that the initial move after 2PM tomorrow could be a fake-out. If the Fed doesn't surprise one way or the other, the initial move may be sell the news: buy stocks (hawkish fear lifts), sell crude (dovish fear lifts), sell bonds (outflows from safe haven buyers).