A Rate Cut Is Coming, But That's Not What Will Move the Market Today

After the last Fed rate cut, Fed Chair Jerome Powell spooked the market when he commented that another rate cut was not a sure thing. The odds of a December cut fell sharply on those comments but recovered to a near certainty on news of weak employment numbers and slightly softer inflation.

A quarter-point rate cut is very likely to be announced Wednesday, but that isn’t the issue that will move the stock market. The more critical issue now is whether the Fed will signal it is on hold for a while as it awaits further economic news.

To complicate matters, President Trump will likely nominate a new Fed Chair very soon, but that individual will not take office until May. There are several Fed meetings before then, and Powell may not be inclined to give in to political pressure to cut more aggressively if he is leaving office anyway.

The immediate issue for investors is whether the Fed decision will trigger a sell-the-news reaction. Recent technical action has been nervous, with the S&P 500 pulling back over the last two sessions after an intraday top on Friday.

While the indexes have been lackluster, there has been continued interest in smaller stocks, with the Russell 2000  (IWM)  outperforming. Stock pickers have been active, hunting for good charts and favorable valuations in hopes of catching a Santa Claus rally as the year comes to an end.

The bears are generally inclined to anticipate a sell-the-news reaction to the Fed if there is positive price action before the news. However, that often fails to work, as there are plenty of dip buyers waiting for the opportunity to add at lower prices.

The key question for traders is whether Powell will frighten the market again with a hawkish tone. If he does, will that create a buying opportunity or create a more significant pullback?

One problem for the bears is seasonality. Positive action at the end of the year is a well-known tendency, and it can become self-fulfilling once it takes hold.

Another issue to watch is rotational action. Oracle  (ORCL)  will announce earnings after the close Wednesday, which will stir up debate over AI valuation. Oracle stock has already fallen over 35% from its highs in September and given back all the gains after announcing a massive data-center initiative. There is going to be a very intense debate about whether the market has made a mistake in valuing Oracle, and that will impact the entire AI sector.

While AI has been struggling lately, there has been rotational action into other areas of the market, which is holding up the indexes and creating pockets of strong speculation. Seasonality may help that to continue, and if AI weakens, it could enhance it even further.

We have a sluggish start as we await Jerome Powell and his crew.

At the time of publication, Rev Shark had no positions in any securities mentioned.