Investors Are Not Optimistic About the Fed
Abysmal breadth and widespread selling suggests Kevin Warsh will have a hard time calming markets.
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Based on Tuesday’s action, we can safely conclude that investors are not optimistic about the Fed’s interest rate decision on Wednesday afternoon. There was a steady drip of selling all day, with abysmal breadth of just 32% positive. New 12-month lows expanded to over 350 names against 100 new highs.
A few chip stocks, including Nvidia (NVDA), bounced, and big oil was up as well, but secondary stocks saw no speculative action. The Russell 2000 (IWM) dropped 1% and is now back to levels last hit on June 11. Three months of gains are gone.Â
Narrow on the Surface, Ugly Underneath
Technical action is poor, with the S&P 500 closing below its 50-day simple moving average. But so far the correction in the senior indices is fairly shallow due to some rotational action. Many individual stocks have been hit hard, and spurts of rotation have protected the indices to some degree.
That is the same issue that has been ongoing for many months. The index level understates the damage because money keeps moving from group to group rather than leaving the market. More than 350 new lows on a day the S&P fell less than 1% tells you where the real selling is, and it is not in the high-visibility names.
It All Comes Down to Warsh
The big issue now is what happens with the Fed decision on Wednesday. A rate hike is widely anticipated, so the hike itself is not the question. The reaction will depend on the commentary offered by Fed Chair Kevin Warsh. Investors want to know whether this is the start of a series of hikes or just fast, preemptive action that ends here.
Unfortunately, with Warsh, we are not likely to get much clarity. He has made a point of not signaling his intentions, which is the whole reason the uncertainty has been this high. A hike paired with reassuring language could actually calm the bond market. A hike with hawkish or vague commentary could push yields higher and take stocks down with them. We will find out at 2 p.m. ET.
Game Plan
At this point, there is little choice but to embrace the fact that the market is correcting, and there are no indications that it is over. The bottom line is that interest rates are moving higher and that hurts the stock market.
I am not going to fight it and I am not going to guess at the Fed reaction. The shopping list is long and getting longer, and the setups I want will come out of whatever Thursday’s decision produces rather than ahead of it. A market under a rising 10-year yield does not need me to catch the exact low. It needs me to have cash and patience when the pressure finally lifts, and that is where I am.
Have a good evening. I’ll see you tomorrow.
At the time of publication, DePorre had no positions in any securities mentioned.
