Investors Prepare for Increased Volatility as the Fed Gets Set to Cut Interest Rates
Is the 'sell-the-news' setup just too obvious?
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The Federal Reserve is set to cut interest rates this week for the first time since December 2024. It is expected that this will be the start of a protracted easing cycle. Goldman Sachs states: "We expect three consecutive 25bp cuts in September, October, and December, followed by two more cuts next year to 3-3.25%. A 50bp cut is also possible at an upcoming meeting if the labor market deteriorates more quickly."
The stock market has been anticipating this move for a while, and after lower-than-expected jobs data and softer-than-expected inflation news, there is now no doubt that the Fed will make a dovish pivot.
Many pundits and economists believe that the Fed has made a policy error by not moving faster. Bad data from the Bureau of Labor Statistics overstated the health of the jobs market, and now the Fed is behind the curve and needs to catch up. In addition, fears of tariff-induced inflation have not developed, although there is still concern that it is in the pipeline and will be seen soon.
Meanwhile, the market has been trending higher since April, and with the major indexes at all-time highs, it creates a very dynamic technical situation. This is a classic "sell-the-news" setup with the indexes technically extended as very well-known and expected positive news is about to hit. For investors and traders who are worried about the market becoming too frothy, it is a perfect opportunity to reduce market exposure.
The problem with this argument is that it is too obvious. All sophisticated investors can see this coming, and that means it is less likely to work as expected. If there really is fear of a selloff on a rate cut, then look for some pressure before the announcement on Wednesday afternoon.
There have been a number of other "sell-the-news" setups recently on economic data, and none of them worked as anticipated. In fact, the good news fueled more buying by squeezing anticipatory bears and creating "fear of missing out" for underinvested bulls.
I expect elevated volatility this week and will stay focused on the technical health of the stocks that I own. I raised my cash levels last week and am happy to be a buyer, but it is extremely difficult to find good technical setups right now.
We have a mild positive start on Monday morning with Tesla TSLA leading on a large insider buy by Elon Musk, while Nvidia NVDA is lagging on Chinese antitrust claims.
At the time of publication, Rev Shark was long NVDA.
