The Bulls Are Lulled by a Story of Goldilocks, but Risks Could Come Knocking

In the course of two weeks, the market has shifted from panic about a slowing economy to celebration of a "Goldilocks" economic story, in which inflation is not too hot and growth is not too cool. The markets enjoyed their best week of the year as investors rushed to embrace a more bullish posture as worries about the economy collapsed.

The issue now is whether this upbeat economic narrative continues as the market anticipates a Fed interest rate cut at its next scheduled meeting on Sept. 18. There currently is a 72% chance of a quarter-point cut and a 28% chance of a point cut.

If economic worries flare up again, then the chance of a half-point cut will likely increase and that may be a market negative. The conventional wisdom is that actual rate cuts may be a classic sell-the-news situation, but traders are very aware of this and may start to position themselves for this possibility before the actual event.

There isn't much economic data on the calendar this week, but there are Fed minutes on Wednesday and home sales numbers later in the week. The big event will be on Friday when Fed Chair Jerome Powell speaks at Jackson Hole. The Jackson Hole event has been a significant market mover in the past, but it is unlikely that Powell will have anything really surprising to say at this point. The most important issue will be his tone and how confident he is that inflation has been tamed and the Fed is safe to cut rates to bolster economic growth. Powell has been very noncommittal for a while and will likely stay that way, but it is obvious that a rate cut is coming, and he may signal that with more confidence.

The market has had a big bounce and has some strong momentum as it confronts technical overhead. The biggest negative now is that many charts are extended, and there are few good entry points. A few days of flat action or minor weakness will help fix that situation, but negative seasonality looms.

We are entering the worst time of the year for the market, and while it's not certain, seasonality could be self-fulfilling -- especially if the Goldilocks' economic narrative loses its appeal. There is the potential for a quick shift in economic sentiment, especially since the bond market seems to be much more concerned about the economy than the stock market. Bonds are considered the smart money but the stock market is ignoring whatever they may be saying. Equity investors expect a soft economic landing regardless of what bonds are saying.

My game plan right now is to be very selective with any new buys. I'm struggling to find charts that are ripe for entry, and my cash levels have been increasing. I'm not bearish, but my level of bullishness is dependent on finding stocks with good charts, and there aren't that many.

We have a mixed open shaping up on Monday morning

At the time of publication, DePorre had no position in any security mentioned.