“Don’t fight the Fed,” says the old adage.

But that’s exactly what traders — carbon-based and otherwise — did in January, when stocks roared higher despite Fed rhetoric which, although consistent with the expected downshift to “regular” rate-hike increments for whatever’s left of the cycle, retained an obstinate tone vis-à-vis policymakers’ intention to keep rates high for a prolonged period.

“A Fed pause is undoubtedly worth some lift to stocks but once again we want to remind readers that both bonds and stocks have rallied already on that conclusion,” Morgan Stanley’s Mike Wilson said this week, referencing market participants’ efforts to front-run the last hike.

The chart below shows a liquidity proxy (which includes SOMA, the Treasury General Account and RRP) plotted with US equities.

“The aggregate liquidity backdrop and the S&P [are] now showing the first major divergence in a while,” Wilson cautioned, noting that although a Fed pause is coming, QT continues and the Committee is adamant that rate cuts aren’t likely anytime soon.

“Investors seem to have forgotten the cardinal rule of ‘Don’t Fight the Fed’,” he chided, 48 hours prior to the February policy decision.

On Wednesday, Jerome Powell stuck to the script. The Fed will persist until the job is done and it’s too early to talk about rate cuts.

Related:

Mike Wilson Doubles Down: Rally ‘Just Another Bear Market Trap’