A Fed Meeting and Another Busy Week of Earnings Keeps the Market's Plate Full
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There’s a lot of uncertainty around the messaging Fed Chairman Powell and the FOMC might provide on Wednesday at the end of its 2-day meeting. After 3-straight months of higher-than-expected inflation data, do they worry that the cooling of inflation has seriously stalled on a more longer-term basis? Are they possibly worried that inflation might continue to even creep higher?
Recall that on April 16th, Powell signaled in comments that rates are likely to stay higher for longer, as he stated that it will take "longer than expected to achieve the confidence needed to get inflation down to the Fed’s 2% target.” I suspect that the Fed hedges its bets on Wednesday, and simply admits that it will continue to play the waiting game and monitor incoming data.
For investors, I think it’s prudent to err on the side of the Fed having a more hawkish tone rather than a less hawkish tone, and not be overly exposed to highly yield-sensitive stocks going into the meeting announcement.
Fed fund futures are currently pricing in the September 18th meeting as the first time the Fed will cut rates in this cycle, but I doubt that the Fed would make such a move right before a presidential election (in November). That puts the Fed’s December meeting as the most probable date of a cut.
One of the more interesting possibilities in all of this, in my view, is just how positively will the market respond if we get an inflation data set that comes in better-than-expected, or even right at consensus expectations? I presume that the market would react quite positively/strongly after 3 straight months of disappointing inflation data.
Despite the 3-months of hot inflation data, and expectations for 2024 rate cuts being substantially reduced from 6 (in late 2023 and early 20024), down to perhaps just 1, the market has held up pretty well. What happens if we get a “welcomed” inflation report? i.e. It comes in below expectations, or even in-line with expectations? I expect that we’ll get a strong rally to new highs — as long as earnings and GDP growth continue to be solid.
Breadth improves quite nicely on any day that Treasury yields are down, and you can easily see it in the advance/decline data, and “feel it” on the tape. Speaking of breadth, the S&P 500 Intermediate Term Breadth Momentum Oscillator is flashing a buy signal with the fast (black) line moving back above the slow (red) line. If we get a little cooperation from Treasury yields, we’ll probably see some pretty good market action.
The Nasdaq’s ITBM oscillator is also flashing a buy signal. Will the Fed spoil it on Wednesday with “hawkish” messaging?
As it currently stands, the major indexes are in consolidation mode, and both the S&P 500 and Nasdaq are now testing overhead resistance at their 50 day-moving-averages (dma).
And the tech-heavy Nasdaq.
Monday’s modest market rally, in front of the Fed’s meeting, was helped by a welcomed decline in both Treasury yields and the dollar. A continued decline in yields will almost certainly boost stocks further, unless the market starts sniffing out a material economic slowdown. I don’t see that on the horizon.
As for the economy, on Friday we get the jobs report for April, and that may possibly tip the yield-direction scale one way or another if it comes in materially higher or lower than expected. March’s job report (released on April 5th), came in substantially higher than expectations, and Treasury yields have trended up since.
We’re in heavy earnings season, and the market is currently trading sideways/basing. As such, combining good earnings reports/guidance and bullish stock technical setups is usually much more beneficial than being right or wrong about the specific movements of the major indexes — unless the tape sours or deteriorates in a significant way.
Earnings continue to generally come in better-than-expected, so it’s difficult to get real bearish on this market as long as yields don’t run too far, too fast. The most closely watched earnings this week will be Amazon (AMZN), which reports after-the-close on Tuesday, and Apple (AAPL) reports after the close on Thursday.
That’s is for now, I’ll write more soon. And as always, I’ll be posting frequent market commentary on WMI’s private Twitter (X) page.
Now, on to a new/updated long & short focus watchlist.
Focus Watchlist
I try to recommend trades that are timely and that a breakout/breakdown is likely to occur soon. If I take a stock or ETF off the focus watchlist, it may be because the trade needs more time to ripen, it ran away from us, or I’m no longer considering it at all.
Longs:
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