Investors Move Into Position for a Pivotal Interest Rate Decision
A rate cut is near certain, but the Fed may not be as dovish as hoped. Here is how I’m preparing.
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Market action was mixed on Monday, with selling pressure on big-cap technology but continued interest in select small-caps. Breadth was negative, although pockets of speculative trading benefited astute stock pickers.
The mixed action is likely to continue on Tuesday as investors move into position for the Fed’s interest rate decision that will be released Wednesday afternoon. CME futures indicate an 89% chance of a quarter-point reduction. However, the primary focus will be on what happens next.
Fed members are sharply divided on the level of dovishness, and the likely next Fed Chair, Kevin Hassett, sounded somewhat cautious about committing to cuts next year. Investors will also be looking closely at the Fed’s updated economic projections.
The bond market (TLT) has been slipping for the last two weeks as concerns grow about what will follow the likely quarter-point cut. Economic data have generally been better than expected, and there are still signs of sticky inflation that are causing concern.
The Fed decision is unlikely to contain any significant surprises, but it will still be a very important catalyst for whatever the market does next. Will investors sell strength, buy weakness, or panic if there are some hawkish comments? There are plenty of opinions about the potential response, which will result in positioning action on Tuesday and Wednesday morning.
My best advice is not to focus too much on the indexes. There is quite a bit of rotational action, and more focus on individual stock picking. This is not index-driven action right now. Investors are looking for new sectors and themes to lead while the AI group undergoes a reassessment.
The latest development in the AI group is that President Trump has stated he will allow China to buy Nvidia’s (NVDA) H200 chips and also loosen restrictions on other chips. Nvidia rose on the news overnight but has already given back most of its gains, as questions remain about whether China will rush to buy U.S. chips. This could end up being a "sell the news" event for chip stocks.
I’ll focus on finding good chart setups and then wait for the Fed news to create volatility to trigger entries and exits.
We have a mixed start early on Tuesday morning.
At the time of publication, Rev Shark was long NVDA.
