Keep Watch for These 2 Scenarios as Powell Gives Jackson Hole Speech
This is how I'll play the Fed talk and what I'm looking out for.
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Investors are bracing for a strong reaction to Fed Chair Jerome Powell’s speech at Jackson Hole, which takes place at 10 a.m. ET. It is unlikely that Powell will say anything too surprising: He will again stress that the Fed remains focused on data. What will matter is the degree to which he acknowledges that a September rate cut will occur and whether he hints at the possibility of a half-point cut.
The market has been very upbeat about economic conditions. Inflation seems well under control, and no immediate concern for a recession exists. Powell and the Fed look poised to engineer a very rare soft economic landing after raising rates aggressively.
The market has been building up to this event for a while and has enjoyed the best rally of the year over the last 2 ½ weeks. Investors took some profits in front of the news, leading to a market pause late this week. But a partial rebound is brewing early on Friday.
The primary issue for traders to consider today is what spin emerges. Does Powell confirm the "Goldilocks" economic narrative and foreshadow a series of rate cuts that will keep things running? Or, does the market become concerned that it has already priced in the good news?
Technical conditions favor a sell-the-news response to Powell. We got a taste of it on Thursday, but the action did little to fix overbought conditions. Charts are not offering good entry points now, and they won’t until they either consolidate or pull back.
As we end the quarter, one interesting development is that the "Magnificent Seven" tech star stocks are lagging behind the rest of the S&P 500 for the first quarter in nearly two years. The market leadership of artificial intelligence-related stocks is slowing and we see not rotation into the broader market. That is good news that can help sustain a bull market, but it will cause some difficulty for the folks who have grown used to a very narrow big-cap market.
The Powell speech will likely see the same sort of reaction as a Federal Open Market Committee meeting interest rate decision. As the market digests the news, brace for likely whipsaws. Also, know that no clear trend will immediately develop.
I’m positioned with a high level of cash and will be looking for opportunities on a surge in volatility.
At the time of publication, DePorre had no position in any security mentioned.
