Powell Is Walking a Tightrope as Rate-Cut Cycle Begins
The Fed wouldn’t be cutting rates this aggressively if they didn’t see some softness developing.
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The Fed cut interest rates by a half-point on Wednesday afternoon, which was more aggressive than expected, but not a huge surprise. The central bank also indicated the likelihood of another half-point in cuts later this year, but the tone was not as dovish as some had hoped. Fed Chair Jerome Powell indicated that the Fed will be watching jobs news very closely for additional weakness.
The initial market reaction was positive, but that only lasted for a few minutes before there were a number of whipsaws and a weak close. The indexes closed near the lows of the day. Technical conditions suggested the likelihood of a "sell the news" reaction, but it has been relatively mild so far.
Powell is walking a tightrope and doesn’t want to spook the market because of the fear that the Fed is behind the curve and trying to catch up with a big half-point cut. His message at the press conference was that there is economic slowing, but this cut is an insurance policy that will give us greater ability to deal with a slowdown.
While the market is still embracing the Goldilocks economic narrative, there is now some increased nervousness about a potential recession. The Fed wouldn’t be cutting rates this aggressively if they didn’t see some softness developing, but how strong would this economy be?
At the close, the Russell 2000 small-cap index IWM was close to flat, and breadth had shifted to negative. The Nasdaq 100 QQQ and the Magnificent Seven (MAGS) names lagged. Nvidia NVDA disappointed with a loss of 2%. It is on my shopping list but has no support on the chart right now.
The big issue will be price action on Thursday after the Fed news is digested. We had the reversal and the start of some sell the news action, which could easily gain further downside momentum Thursday, but we will have to see what economic narrative develops.
My main focus is chart development in individual stocks. A pullback is not a bad thing, but it could be painful if there isn’t some fairly fast support. Keep in mind that negative seasonality is now in play as well. I wanted to buy some favorite names lower, but existing positions may pay a price.
Have a good evening. I’ll see you Thursday.
At the time of publication, Rev Shark was long NVDA.
