Will the Fed Slow Down Extremely Lopsided Market Strength or Accelerate It?
The market loves to love the Fed, and that tends to favor the Magnificent Seven names.
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The primary question the market is facing on Wednesday morning is whether the CPI report and the Federal Open Market Committee's interest-rate policy decision will shift the market action.
Over the last eight sessions, the market has been increasingly narrow, with Apple AAPL leading the charge on Tuesday with a hefty technical breakout. While the Russell 2000 small-cap index IWM and the DJIA are struggling with their 50-day simple moving average, the Nasdaq 100 QQQ and S&P 500 are hitting new all-time highs. The disparity between the Magnificent Seven names and the rest of the market has hit the most extreme levels since the internet bubble in 1999-2000.
There is little coverage in the business media of how unusual this market action is. While the S&P 500 is hitting a new all-time high, there are more stocks on the New York Stock Exchange hitting new 12-month lows than highs. Breadth is poor, and volume is flowing into declining stocks.
This narrowness has been a theme for the last two years, but it is now becoming so lopsided that market players have to wonder how much longer it can be sustained. What will trigger a reversion to mean and allow the gap between the small group of winners and the big group of losers to start to shrink?
Perhaps economic news will trigger the shift.
The CPI Report will be released at 8:30 a.m. ET. The core CPI is expected to stay at 0.3% month over month, while the headline number is expected to fall to 0.1% from 0.3% last month. Any large variation is going to generate a sizable increase.
However, the Fed decision at 2 p.m. ET and the Jerome Powell's press conference that follows will have the biggest market impact. The Fed is very unlikely to change interest-rate policy at this meeting, but the key will be whether there are any hints about future rate cuts. Market participants will be watching the dot plot carefully. Currently, expectations are for two cuts of a quarter point each before the end of the year.
The market hasn’t been able to trend higher even though rate cuts have been consistently pushed back due to stubborn inflation and some good jobs news. The Fed is likely to remain data-dependent, but the market loves to love the Fed and often digs deep to find a bullish spin even when there isn’t much new information.
Will the news Wednesday push the market to become even more lopsided, or will it finally trigger some rotational action to close the gap? The smart bet has been to stick with the big-cap winners, but we have to continue to watch for a shift in the action.
At the time of publictaion, Rev Shark had no positions in any securities mentioned.
