The Fed, the Rotation, and Why IBD Is at Minimum Exposure
As the Fed decision sets up for a strong reaction, here’s what to watch. Plus, why IBD is at minimal market exposure while the Dow rallies.
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The Fed announces its interest-rate decision on Wednesday afternoon and Kevin Warsh’s policy of not signaling future action is creating conditions for a strong reaction. Interest-rate futures put the odds of a hold at about two-to-one. What matters is the tone, and whether it leans dovish or hawkish. In the past the market usually had a good idea of what the tone would be but under Warsh there is a much greater degree of uncertainty.
One issue to watch is the level of dissent. Both Cleveland Fed President Beth Hammack and Dallas Fed President Lorie Logan are expected to dissent in favor of a hike. If a third dissenter emerges, that would indicate that the hawkish bloc is growing rather than holding, and that would increase the likelihood of a hike at the September meeting. Warsh has been careful to say little about policy direction, so the market will be looking at clues in the level of dissent.
Why IBD Is at Minimum Exposure
Investor’s Business Daily uses a market timing system that reacts to changes in technical conditions. After several poor days of action it dropped its recommended market exposure to 0% to 20%, which is the lowest reading their system produces. It maintained that suggested exposure level on Tuesday night despite the fact that the Dow gained 537 points and its acknowledgement that there was “no shortage of strong gainers” across healthcare, insurance, and consumer names.
While that looks like a contradiction it is not. IBD’s model cannot raise exposure without a specific sequence of events. The market has to put in a low, mount a rally attempt, and then deliver a follow-through day with heavy volume that confirms the attempt. We have not had that sequence. No amount of good action in individual names is a substitute for it.
IBD’s system is not a forecast that stocks are going lower. It is the absence of buying confirmation. The system stays defensive until the market hands it the evidence it requires, and a market that keeps rotating without ever producing a washout never generates sufficient bullish evidence. It can sit at minimum exposure while stock pickers are feasting on market rotation.
2 Reactive Systems Counting Different Things
The IBD approach and my own are both reactive rather than predictive. Neither one tries to call the turn. The difference is what each one counts.
IBD counts index confirmation. In a rotational market where the indexes go sideways while money moves between groups, that count stays at zero. My approach focuses on setups in individual stocks, and a rotational market produces plenty of them even while the senior indexes do nothing. That is why IBD’s exposure and my shopping list can point in opposite directions right now without either being wrong.
Every reactive approach to the market makes the same trade. Rather than trying to anticipate the exact moment the market makes a significant turn, you stay with the trend in either direction until there is clear evidence that there is a shift in market character.
You give up the early entry in exchange for not being wrong for weeks. IBD gives up on the rotational market entirely and in return never rides a bear market down. That is a defensible choice and their record supports it. It also explains why suggested market exposure of just 0% to 20% is telling you that growth leadership is broken rather than telling you that the entire market is broken.
The Chips Are Still the Problem
SK Hynix (SKHY) delivered the most profitable quarter in its history with operating profit up 557% from a year ago, and the stock fell as much as 13% before bouncing back and is currently close to flat. That is the same treatment Alphabet (GOOGL) got last week and Micron (MU) got in June when they posted great numbers. The results are not the issue but expectations are.
Tuesday’s session illustrated how strong the rotational action has become. SanDisk (SNDK) fell another 14% and Micron shed 8.9% with the semiconductor index down 4.5%, while the Dow gained 1% on strength in names like Sherwin-Williams (SHW) and Coca-Cola (KO). The IBD 50 ETF (FFTY) was down 1.7% intraday and reversed to close higher.
Game Plan
My approach has not changed. I am watching for mispricing and technical setups in individual stocks and I expect strong rotational action to continue regardless of how the market takes the Fed news.
The earnings calendar for smaller stocks is packed and those reports start hitting soon. That is where the next batch of opportunities for aggressive trading is going to come from. Big-cap technology has been producing volatility without producing the setups that I want, and the smaller names have not had their turn yet.
Microsoft (MSFT) and Meta Platforms (META) report after the close, which means the Fed decision, the press conference, and two mega-cap capex updates all hit within a few hours of each other. I have no interest in trying to guess how that will sort out. The opportunities will be there afterward.
At the time of publication, Rev Shark had no positions in any securities mentioned.
