Calm Action Attracts Investors as Fed Fears Subside
The bounce off the quick fall on Federal Reserve Chair Kevin Warsh helped calm emotion.
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There was a quick swing at the open on Thursday, but it turned into an OK day for investors. The opening gap was sold off, the market drifted higher through the afternoon, and it closed with solid gains.
Breadth was good at 63% positive; the Nasdaq 100 (QQQ) and the Magnificent Seven led, and the semiconductor group (SMH) rose close to 3%. The biggest negative was that the Russell 2000 (IWM) closed at the lows of the day with a gain of 0.6%.
The bond market is why rate-sensitive names led. The 10-year fell back below 5% to around 4.945%, after pushing above that level right after the Federal Reserve on Wednesday. That is the key issue the market wanted to see. The question all week was whether yields would break decisively through 5% or stabilize, and on Thursday they stabilized, which let the chips and the big-cap technology names catch a bid.
Is the Magnificent Seven Back?
I heard some chatter on Thursday that the Magnificent Seven is back, which seems premature at this point. One good day after a sharp drop is not evidence of anything. The bounce off the quick fall on Fed Chair Kevin Warsh helped calm emotions, and buyers inched in, but calming emotions is not the same as building sustained momentum.
The question now is whether there is enough buying interest to create a real trend, and I will be open-minded about the possibility, but the proof will be in the price action over the next several sessions. A one-day bounce following clear bad news does not tell us the market has discounted the negatives of a protracted fight against inflation and more hikes.
Better News
The good news is that this might be turning into a better environment for stock picking. For a while it has been choppy due to rotational action, with few sectors being able to generate sustained trends. If there is less focus on what the Federal Reserve will do next, then individual charts get easier to trade. The stocks that are working can keep working instead of getting jerked around by the next macroeconomic headline.
That is what I am watching for. Not whether the Magnificent Seven is back or whether the indices found a bottom, but whether the stocks I’m watching start to develop and hold trends. The best tell that this is turning is not an index level. It is a group of individual stocks that stop reacting to every macro swing and start moving on their own merits.
Game Plan
My approach is unchanged. I trimmed into the strength on Thursday morning, I made no new buys, and I am staying selective while I watch the charts. Thursday was encouraging but it was one day, and one day does not overturn a hawkish Fed, oil near $100 and the weakest stretch of the seasonal calendar.
Have a good evening. I’ll see you tomorrow.
At the time of publication, DePorre had no positions in any securities mentioned.
