Uncertainty Over the Size of the Fed Cut Will Trigger Enhanced Volatility
The chart will determine the market move more than the news itself.
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Many market participants have been hoping for the Fed to cut interest rates for over two years. On Wednesday, they will finally get their wish. But will it trigger another glorious run for the indexes or be the catalyst to lock in significant gains as the indexes linger at all-time highs?
The most important thing about big news events, such as a Federal Reserve interest-rate cut, is that the reaction to the news will be determined primarily by the chart. The chart determines if the news is perceived as good or bad. Bad news in a bad chart can be positive, and good news in a great chart can trigger a negative reaction.
The most common illustration of this is the sell-the-news phenomenon. When the market is anticipating some good news — like an interest-rate cut — it will anticipate a positive reaction and price in the improved market conditions. However, when the news actually hits, traders sell into the initial reaction and take their gains.
There is a particularly good sell-the-news setup for the Fed decision at 2 p.m. ET. The market has been anticipating this good news all year and has made a very strong run over the past six weeks. The indexes are near highs and are overbought.
There is the additional complication of a wide disagreement over whether the Fed will cut by a half or quarter point. Early on Wednesday, Fed Fund Futures indicate a 65% chance of a half-point cut and a 35% chance of a quarter point.
While many market participants are rooting for a half-point cut, that isn’t necessarily good news if Fed Chair Powell expresses concerns about the economy. There are still many pundits who believe the Fed is far behind the curve and that we are already in a recession. A half-point cut would help to confirm those worries.
There will likely be a good amount of volatility on the Fed news today, especially because of the split over the size of the cut.
After this event is out of the way, we should see a better market for stock picking, as the macro pressures won’t matter quite as much once the Fed easing cycle starts.
We have a quiet start as we await the Fed news.
At the time of publication, Rev Shark had no positions in any securities mentioned.
