Bear Trap!

Following a mixed reaction to the half-point Federal Reserve interest-rate cut on Wednesday afternoon, stocks are blasting higher in the premarket on Thursday. After some reflection, the market is gaining confidence that inflation is under control and that a half-point cut will help ensure a soft economic landing.

There was some concern that the large interest-rate cut would be seen as a tacit admission that the Fed was behind the curve and that it was worried about the danger of a recession. However, Chair Powell signaled that the Fed does not see the necessity to rush to make more cuts and is estimating just two more quarter-point cuts in 2024.

Technically, the market was set up well for a "sell the news" reaction to the Fed. In fact, a negative reaction was so well anticipated that it helped to trigger a poor close on Wednesday. However, it now looks like overly anticipatory bears are trapped, and a combination of a short-squeeze and FOMO is taking hold.

With the indexes already quite extended and the danger of negative seasonality lurking, many market players were looking for some downside action. That could still occur, but the bulls are making a run, and unless there is a very sharp intraday reversal, the bears are likely to panic. There isn’t any immediate news flow that is likely to save the bears in the near term, so they will have to respect the price action.

As I’ve discussed, I’ve raised my cash levels quite a bit lately, but I’ll be looking to make some new purchases today. It will be challenging because there are many extended charts and not a lot of great entry points. 

My plan is to stay very disciplined with entries and to move incrementally. FOMO can drive market players to make poor decisions, and I have to focus on avoiding that issue.

The S&P 500 is indicated to be up 1.6%, and the Nasdaq 100 QQQ is jumping 2% early on Thursday morning.

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