Market Roundup
Dow -289.95 to 16,384.79
S&P -32.12 to 1,958.08
NASDAQ -66.72 to 4,827.23
10-YR Yield -0.09 to 2.13%
Gold +$21.60 to $1,138.70
Oil -$2.12 to $44.78
We’re facing a crisis of confidence today – and it’s one of the most dangerous challenges for the markets.

Confidence in the outlook for economic growth.

Confidence in the knowledge and foresight of monetary policymakers.

Confidence that we will ever, EVER be able to get back to a normal market … one that government officials aren’t meddling in every other day to try to “fix.”

That’s how I see things in the wake of the latest Fed fiasco. And that’s what it was. A fiasco.

Why do I say that? The Janet Yellen Fed has spent months and months preparing investors for a potential interest rate hike. It has spent months and months talking about the improved economic outlook. Multiple, informal targets (on the unemployment rate, for instance) that Yellen and Ben Bernanke before her identified as triggers for policy normalization have come and gone.

Stocks received only a 35-minute bounce after the Fed announcement.

So it stands to reason that they should have moved this week. Heck, they should have started raising rates more than a year ago. But they didn’t. They caved. And after rallying briefly, the stock market fell apart because of the confidence-killing message that sends out.

It says the Fed itself has no confidence in the economic backdrop.

It says the Fed itself has no confidence that inflation and growth will rebound sometime before the sun burns itself out.

It says the Fed itself has no confidence that foreign QE and rate cuts will work to spur renewed growth.

So it’s only logical for investors to conclude they shouldn’t have any confidence in those forecasts, either!

What does this mean for markets – and your investment strategy? Well, the trading action we’ve seen for the past several weeks proves the thesis I laid out for you a couple of months ago: U.S. and foreign central bankers have lost control of stocks, bonds and currencies.

The shelf life of QE/rate cut-driven rallies has shrunk dramatically — to mere minutes from weeks or months. By my count, the Dow’s spike yesterday afternoon lasted all of 35 minutes.

That is a huge trend change from what we’ve had the last six-plus-years, a paradigm shift of epic proportions. It completely validates my clearly communicated stance of caution laid out before stocks began to tank.

I have suggested that the Dow Industrials “should” be trading much lower than it is. That view is based on fundamental economic data, the signals coming from the credit and currency markets, and the declines we’ve seen in overseas markets. On the first of this month, I outlined “catch down” targets that ranged anywhere from 10,000 on the low end to 14,800 on the high.

“That is a huge trend change from what we’ve had … a paradigm shift of epic proportions.”

The crazy market action and hyper-volatility we’ve seen since I provided that (admittedly wide) range only further confirms that downside risk is immense. That’s why I just issued yet another timely Flash Alert to my Safe Money subscribers with two additional, urgent, precautionary moves to make.

(Editor’s Note: If you’re not getting these time-sensitive alerts, click here.)

Let me leave you with one last thought: If there’s one thing I’ve learned in all my years of analyzing and trading the markets, it’s that confidence is a precious commodity. Once you lose it, it can be the biggest market killer of all. And it looks to me like that’s precisely what central bankers no longer have.

What about your thoughts on the Fed here? The post-Fed market action? The next major level to watch on the Dow? Or anything else? Please do share them with me and your fellow investors at the Money and Markets website.

Our Readers Speak

The Fed-led volatility of the past 24 hours shows no sign of letting up. Many of you weighed in on why the Fed froze in the face of higher volatility, and what that signals about the economy and the outlook for markets here.

Reader Dr. Donnie S. said: “You asked: ‘What is the Fed so afraid of?’ Insolvency might be the correct answer. Pssst … Don’t tell anyone okay?”

Reader Al H. added: “You gotta know when to hold them … know when to fold them … know when to walk away … know when to run. The Fed is clueless and the elephant in the room, the Wall Street bankers, are laughing all the way home. Very soon, the derivatives bubble created by the Fed’s monopoly money will burst, wiping out our money supply. What follows next is chaos.”

Finally, Reader Joan said: “The Fed has become simply a political arm of Congress and the White House. All of this crap today is just silly meaningless chatter. The Fed keeps rates at zero simply to facilitate the crazed spending of politicians.

“If they were to let rates ‘normalize,’ the costs of servicing our debt would be so overwhelming as to leave little or no money for defense, entitlements, etc. The end of free stuff. The printing presses could not work fast enough. Disaster of unimaginable proportions would soon ensue. In any event, global forces will soon make the Fed actions meaningless.”

As for what Fed policy means for stocks, Reader Steven suggested it’s less important than earnings – which he believes are poised to shrink from here. His take:

“I would say the market is ignoring the central bankers and their dance around interest rates, and is focusing instead upon earnings. After all, that is why you invest. You exchange cash now for income in the future. The increase in the risk or the decrease in the income will reduce the value of the investment.

“As the Q3 earnings reports come in showing reduced levels of income and failure to meet analysts’ expectations, (as part of the long-term trend we have been watching during Q2) we will see further corrections in the values of corporate equities to levels that should be more supportable in the long run.”

I appreciate everyone’s input, and I pretty much agree with what you said. We’re starting to hear earnings warnings from several leading companies, and we’re seeing more and more chaos behind the scenes in currency and credit markets. That points to more trouble ahead for stocks – a key reason why I continue to urge caution and defensive strategies here.

Didn’t weigh in yet? Then be sure you take advantage of the Money and Markets website to do so this weekend.

Other Developments of the Day

● Easy money isn’t helping the real economy much … but it is creating some killer paydays for Wall Street bankers! That’s because it’s making it cheap and easy for companies to buy and merge with each other. We’ve seen $1.2 trillion in mega-deals, or those worth at least $10 billion, so far this year. That just surpassed the record high set in 1999, which of course marked a major stock market top..

● Add another earnings warning to the heap, this time from software maker Adobe Systems (ADBE). The company forecast weaker-than-expected earnings and revenue for the quarter ending in November, a potential warning sign for other sellers of software who focus on corporate clients.

● Energy producer defaults are rising, with Samson Resources filing for bankruptcy earlier this week and default rates hitting their highest level since 1999. The decline in the price of energy-related junk bonds has driven their average yield to 11% from 5.9% a year ago. I still see value in select names, but the pressure hasn’t eased up on the sector yet.

● Maybe this is a novel solution to the problem of bankers breaking rules. Throw them in a ring with regulators and let them box it out! Apparently, in Hong Kong, this is a thing – “Hedge Fund Fight Nite.” Bankers and financiers duke it out in a ring for charity, while simultaneous auctions raise even more money.

Are you worried about corporate earnings warnings in the coming weeks? What about energy defaults? And how about this global boom in M&A – is it positive for stocks or a sign that thing have gotten so nuts, the bubble is going to burst?

Here’s the link where you can share your thoughts. I’d love to hear them over the weekend.

Until next time,

Mike Larson