***Special Fed Update – No Rate Change – Am I Wrong?***

The stock market model for the day is plus or minus 0.50% until 2pm and then a rally. This is not as high a conviction play as six weeks ago when the rally failed to materialize. FYI, Fed models are not opinions as some have suggested. I am not right or wrong. The models are based on data that we gather, model and analyze on a non-emotional basis.

Today is FOMC Chair Warsh’s second meeting. He dropped a number of bombs at his first meeting, including the establishment of several task forces to remake the Fed into a modern entity while restoring some previously changed protocols to move the FOMC away from minute to minute disclosures and transparency. Warsh has been crystal clear on one half of the Fed’s dual mandate. He has repeatedly stated that the Fed WILL restore price stability (inflation). He continues to downplay maximum employment which we currently have.

Let’s turn to my favorite FOMC chart below which shows the 2-Year Note versus the Federal Funds Rate, a time-tested relationship I deeply respect. As you know, I have been in the camp that the next FOMC move would be a rate cut later this year or in Q1 2027. That has been my thesis because I thought the economy would weaken in the second half of 2026, a position I still have.

Will I be wrong?

Back to the chart, the 2-Year says that the Fed should raise interest rates by at least 0.50% to catch up to where the market is. Obviously, that does not align with my own thinking. Either, the economy will soften over the coming months and today’s data is stale, or I am going to be wrong and the Fed will hike rates. Being wrong is okay. Staying wrong is not. I have been wrong plenty of times and I will be wrong again. Time will tell this time around.

In the markets, the 6-11% Q3 correction I have written about since January is fully underway. On the S&P 500 below, 7200 is a reasonable target.

The NASDAQ 100 where the real carnage has been, is and will occur is below. It has already met my initial downside target. 27,000 is next.

The Russell 2000 is next. The small caps have been the strongest of the major indices and one reason why the bull market isn’t over and should see all-time highs again late this year. The Russell remains constructive and one place to have positions now. It should see new highs first in Q4.

Finally, let’s turn to the semiconductor group below. Twice in May I wrote about this parabolic advance and how they rarely end well and how they punish late comers. During that surge, our Unloved Gems strategy did not add new positions to Intel nor Nvidia, the only two semis we owned. Rather, the strategy pared back more of the holdings.

Semis have already corrected 25% from the highs. It’s interesting that so many pundits and the media which added fuel to the parabolic rally have not labeled semis in a bear market because they’re down 20%+. Semis are not done going down. I expect another plunge sooner than later which should cause some panic and the first building block for a durable bottom.

On Monday we bought more MQQQ. On Tuesday we bought HACK, IWF, more SPHB, more SPCX and more SPCX.