A Huge Intraday Swing Triggers a Bullish Chart Development
The shift on Wednesday was the biggest market swing since the end of the bear market in October 2022.
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Investors did not expect that Wednesday's Consumer Price Index (CPI) report would create any major fireworks, but it triggered significant technical action, which has changed the market's character.
CPI surprised with slightly hotter core inflation than expected. This initially triggered selling as the chances of the Fed cutting rates by 0.5% interest next week dropped sharply. The knee-jerk reaction was that the bigger the cut, the better, but after some reflection, market players embraced the idea that a smaller cut would create a better economic scenario. It means that the economy is staying strong while inflation is still under control. In other words, the Goldilocks economic scenario is alive and well.
This shift in sentiment triggered a significant intraday reversal. The S&P 500 went from a loss of 1.6% in the morning to a gain of 1.1% at the close. The Nasdaq did even better, going from a 1.4% drop to a gain of 2.2%, with the Magnificent Seven names leading.
According to Investors Business Daily, the indexes experienced the largest intraday reversal since Oct. 13, 2022. “If that date rings a bell, it was the day the stock market made a bottom and effectively ended the 2022 bear market.”
The shift in market character caused IBD to become more bullish and raise its suggested market exposure to 40%-60% from 20%-40%.
It is a very interesting technical development, and early on Thursday, there is some upside follow-through. The issue now, however, is whether it will trigger some sustained momentum. There is the PPI report early on Thursday, which may have an impact, but the big upcoming news is the Fed interest rate decision next Wednesday. While there is near certainty at this point of a quarter-point cut, will a runup into the decision trigger a sell-the-news reaction?
We will have to see how the price action develops in the next few days, but this easing cycle is unlike some of the prior ones in which the Fed was racing to deal with a sharp economic contraction or a negative credit event. The central bank is not racing to catch up at this point, and that is a market positive.
I have plenty of cash to work with right now and will be looking to put more to work, but I will not be undisciplined with my buying. Negative seasonality is still an issue that may come into play, and there is very likely to be elevated volatility into the Fed’s first rate cut in years.
At the time of publication, Rev Shark had no positions in any securities mentioned.
