Fed Rate Cut Likely to Spur Whipsaw Market Action

Mild selling occurred on Tuesday as market participants await the Federal Reserve interest rate cut on Wednesday afternoon. There has been a fast and furious run over the last two weeks, but with many stocks now extended and the risk of a sell-the-news response to the Fed, it was a prudent move to reduce risk levels.

There was no rush for the exits. Only about 55 stocks finished in the red, but new 12-month highs contracted to around 180 names, and all the indices had minor losses. The Magnificent Seven MAGS was an exception and managed to tack on an additional gain of 0.5%.

The run up into this rate cut has been unusually large, and that means that there is likely to be a bigger response when the news hits. I am looking for whipsaw action with some big moves in both directions as traders try to anticipate which way the momentum is moving.

For longer-term investors, this isn’t an event that should affect the way they view their key holdings, but it may be an opportunity to add further exposure after the initial drama comes to an end and stocks find support levels.

The key issue isn’t whether or not the Fed is going to cut. The key issue is how dovish Jerome Powell sounds. Does he indicate the likelihood of a long series of additional cuts, or does he continue to talk about being "data dependent"? Any hesitation by Powell to embrace the dovish narrative will be a problem.

I’ll have more on Wednesday morning, but be ready for some volatility on Wednesday.

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

At the time of publication, DePorre had no positions in any securities mentioned.