Nasty 'Sell the News' Reaction Could Follow Rate Cuts

Market action on Monday illustrated an old Wall Street saying: Overbought markets can become even more overbought. 

There wasn't any specific news about the continued buying, but there is some increased speculation that Jerome Powell will signal upcoming rate cuts on Friday at Jackson Hole.

A rate cut is already well anticipated, but it plays into Goldilocks' economic narrative that inflation isn't too hot and economic growth isn't too cold. If the Fed cuts rates by half of a point, it may look like there is some fear that growth is cooling too fast and spook the market, but the odds are for a series of quarter-point cuts.

Breadth was very good once again, with over 7,000 gainers to 2,300 decliners. 750 names hit new 12-month highs, and the Nasdaq 100 QQQ was the leader, with Nvidia NVDA pushing up another 4%.

I've been complaining for the last couple of days about how many stocks are now extended, and how there are few good entry points. The action on Monday just made it worse, but lots of market players are embracing the old adage "the trend is your friend." They are not concerned about overbought technicals right now and are much more concerned about being left behind.

We don't have much news flow on the agenda until Friday's Jackson Hole meeting, so there isn't much to stop this trend from continuing. The big danger is that it eventually sets up the potential for a nasty "sell the news" reaction when rates are actually cut.

My best advice right now is to not get hung up on trying to call a market time. Manage your stock picks and take some profits as they become overextended, but don't waste your time speculating about a market collapse. This market is likely to stay sticky to the upside for a while.

Have a good evening. I'll see you tomorrow.

At the time of publication, DePorre had no positions in any securities mentioned.