I have often said that one of the best ways to gauge the mood of the market is to watch how traders react to anticipated or important news. If the market moves up on what is objectively at best neutral news, for example, traders are looking for an excuse to buy, resulting in a bullish outlook until something fundamental changes to alter that.
On the other hand, selling on “good” news may be an indication that traders are long to the point of being a bit uncomfortable and ready to take profits, meaning that stocks will probably head lower for a few days, or even weeks.
The there is what we saw yesterday after the Fed announced “no change” to interest rates and Jay Powell took to the podium to elaborate on that decision:
That was a market that couldn’t make up its mind.
The initial reaction to the decision and comments was positive, with the S&P 500 climbing from around 5025 to 5090, then sentiment changed, and the index dropped to finish lower on the day. So, what did the Fed Chair say that first sent stocks higher then caused a reversal?
To be honest, nothing much. No change in rates was universally expected, so that in itself had no real impact. What seems to have sent the S&P higher was the fact that Powell indicated that any further rate hikes were unlikely at this point. That would have been a relief if anybody had seriously believed that a hike from current levels was on the cards, but that wasn’t really an issue before this meeting.
The Fed Chair saying that he (probably) wouldn’t do something that the market wouldn’t like but hadn’t yet seriously considered led to the “relief” rally that ensued, but then somebody presumably pointed out something: The fact that Powell felt the need to deny that there would be a hike soon meant that the committee thought a case could be made for one.
That would represent a big departure from the previous stance from earlier this year, when everyone widely anticipated that a cut was coming at some point in 2024.
Early indications as I write this are that the market will open higher again today, further adding to the confusion. If mentioning a hike is a warning sign and if Powell’s language made a cut seem further away, then why on earth are we trading higher?
Well, there’s that sentiment thing again. Traders are looking at earnings, which so far have generally held up better than most expected, at full employment, and at positive, if somewhat uninspiring, economic growth, and are looking for reasons to buy.
So much so, in fact, that we have gone from the prospect of seven interest rate reductions this year prompting bullishness, to where a denial of a hike that nobody had seriously considered was reason enough to buy.
Ultimately, what all that indicates is a market that is directionless in terms of a medium-to-long-term trend. Traders want to buy, but there are enough negative signs around, things like sticky inflation, geopolitical risk, domestic political dysfunction, etc., to dampen their enthusiasm and balance out that bullishness.
So, we are left with a market that will probably continue to trade in a fairly tight range for a while. That makes it a “stock picker’s market,” where the performance of individual stocks will vary, even if the market overall remains essentially flat. Usually in that environment, fundamentally sound companies do better than the more risky, speculative bets. Value also tends to outperform growth, so those should be the areas of focus for investors until something significant changes.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
