A Dove Flutters Over Wall Street, Stirring Up Stocks

For the last six weeks, the market has been ramping up on expectations for a series of rate cuts starting in the spring of 2024. It appeared contrary to what many Fed members were signalling, but the Goldilocks economic narrative of lower inflation and strong economic growth fueled a strong uptrend.

It was widely expected that the Fed would hold rates steady when it announced its policy on Wednesday afternoon. Still, the consensus view was that it would hint at an additional rate hike, continue with a hawkish bias, and give mouth service to the theme of "higher for longer."

The market exploded higher on the Fed news when the Fed dot plot indicated that many members were looking for: three interest rate cuts of a quarter percentage point each in 2024. This still is not as dovish as the broad market, but the Fed moved much closer to the bullish view that was not expected.

The market was right to anticipate some aggressive rate hikes, but the big surprise was that the Fed seemed to have agreed.

The indexes exploded on the news, and we didn't see the typical short-term swings as the news was digested. There was one brief dip, but the indexes pushed to the day's highs at the close on breadth of almost four to one. Some shorts were forced to cover, and a meaningful amount of bulls are underinvested and trying desperately to put more cash to work. One of the most notable aspects of the action was the small caps that led the charge. The Russell 2000 jumped a massive 3.5%, while the Nasdaq 100 lagged with a gain of just 1.3%. The big "Magnificent Seven" names were laggards in the euphoric action.

I'm not sure what the next level up is from "Fear of Missing Out," but we had a taste of it on Wednesday afternoon. The market was clearly caught by surprise, with many traders feeling very confident that the Fed would finally trigger a pullback.

This is obviously a very bullish development, but the dilemma now is that an extended market is even more extended, and if you thought entry points were challenging a week ago, they are nearly impossible now. If you haven't been an aggressive chaser, you are likely sitting on quite a bit of idle capital.

We have just a little over two weeks left in the year, and this action creates dynamics for some very volatile action as we wrap things up. There should be plenty of opportunities for traders with the right mindset.

Have a good evening. I'll see you tomorrow.

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