The Market Celebrated a Mediocre CPI Report. But It Still Has One Big Problem
Can stocks keep running higher into the Federal Reserve interest rate decision next week?
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A very positive reaction to an in-line CPI report surprised the market on Wednesday. However, now the question is whether the momentum will continue into the Federal Reserve interest rate decision next Wednesday afternoon.
While the CPI report was unsurprising, it cemented the likelihood of a quarter-point cut and triggered a rush into the Magnificent Seven stocks. This pushed the Nasdaq over 20,000 and trapped some skeptics that have been growing more bearish following some toppy technical action.
The key question now is whether this strong positive reaction to mediocre economic news will produce sustained upside momentum. Technically, the market would be in better shape if it had pulled back more before attempting a Santa Claus rally, but instead, we still have some overbought technical conditions.
Another problem is that the action has narrowed, and we are back to a handful of mega-caps such as Tesla TSLA and Alphabet GOOGL driving the market while the Russell 2000 IWM and speculative action are struggling. There was a rebound in Bitcoin IBIT, but the action in individual stocks was not as robust. There were only about 500 new 12-month highs despite the new high in the Nasdaq.
What continues to drive the market is post-election optimism. Small business optimism has surged and is at its highest levels since June 2021. When combined with positive seasonality, a Fed that is about to cut rates, and few signs of elevated inflation, it is no surprise that the mood is upbeat.
The market’s biggest problem is that the mood may be too positive, and when the Fed cuts rates next week, it will be a classic "sell the news" situation. We will start to see some positioning in front of that event, and it is likely there will be some concern about a negative reaction from the Fed.
One of the big problems that the market will face is the possibility of a far less dovish Fed in 2025. Current expectations are for a few more quarter-point cuts, but that has been dwindling, and it will be a problem if the economy does not live up to lofty expectations.
We have a soft open on Thursday following a disappointing earnings report from Adobe ADBE.
At the time of publication, Rev Shark was long IBIT.
