Will the Fed Slow Down the Magnificent Seven Rampage?
Here's what traders need to watch as the Fed makes its decision.
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The market has been dealing with a highly unusual divergence as the Magnificent Seven stocks race to new highs while the DJIA struggles with its worst losing streak since the 1970s and the S&P 500 deals with twelve straight sessions of negative breadth.
The trillion-dollar question on Wednesday morning is whether the Fed Reserve interest rate decision at 2 p.m. ET will end the growing disparity between a very small group of big-cap technology stocks and everything else.
The Fed is widely anticipated to cut rates by a quarter point. Fed Fund futures reflect a 95.4% probability of a cut Wednesday, but there is only a 16% probability of another cut in January. What market players will be most focused on are comments by Jerome Powell about a pause in Fed activity and the issue of sticky inflation.
Some economists now predict that there will be no further cuts in 2025, but the market has been holding on to a Goldilocks economic narrative in which economic growth is strong enough to offset worries about slightly higher inflation. If that narrative shifts to greater concern about inflation, it is going to shake up various market trends as it digests the news.
The key question for traders is whether a correction in the Magnificent Seven will cause a rotation back into the Russell 2000 and the rest of the market. Since November 25, money has been pouring into the Mag 7 and out of everything else. Bitcoin has been holding up reasonably well, and there is some speculative action in quantum computing stocks, but the average stock in the S&P 500 and the DJIA has been in a steady downtrend.
The optimistic view is that the Fed will trigger a rotation back into the broader market and help to propel a traditional Santa Clause rally. Tax-loss selling will be winding up, and there is a reasonable likelihood of a January Effect bounce for some of the stocks trading near lows.
The market action is a very strange brew, but the Fed would be a convenient catalyst for a change in character.
At the time of publication, Rev Shark had no positions in any securities mentioned.
