Bulls Face These Growing Obstacles as the Market Rally Slows
The Goldilocks economic scenario is starting to face skeptics. But is that a bad thing?
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Market action was mixed on Wednesday, with breadth turning negative and the Russell 2000 IWM lagging after recent relative strength. The latest PPI report will be released on Thursday morning and will help determine whether worries about an uptick in inflation will gain traction.
The most notable action on Thursday was continued strength in Bitcoin IBIT and the dollar while interest rates spiked and concerns grew about how much the Fed will cut rates in 2025. There is still a tremendous amount of optimism about a surge in economic growth, but worries about inflation and interest rates are creeping higher.
These inflation worries are occurring at the same time that the indexes and many stocks are becoming technically extended. Market players have been looking for an excuse to take some profits and bonds, and the strong dollar is a good excuse.
So far, there hasn’t been any significant technical damage. On the contrary, the hesitation in some areas of the market is healthy consolidation. Stocks need a rest after some of the best post-election action in history.
If interest rates and the dollar continue to trend higher, it will reflect growing concern about inflation, which will ultimately be a major market issue. The market currently believes that the economy can handle much greater growth without causing too much inflationary pressure. However, that thesis will be tested if rates and the dollar do not relent. The Goldilocks economic bulls are still firmly in control, but they are starting to face some skeptics, and that will determine what the futures hold.
A higher level of skepticism might actually be a market positive, however. The market would benefit from a wall of worry that slowly sucks in more capital from the sidelines when a major correction does not occur.
The biggest market positive continues to be a shift to stock picking. While the S&P 500 is quite expensive on a P/E basis, there are many stocks that are still relatively good values, and there is more focus on finding them. That should continue as we move into positive end-of-the-year seasonalty.
In the short term, the key issue will be holding support levels. Weaker price action is healthy as long as it doesn’t go too far.
At the time of publictaion, Rev Shark was long IBIT.
