My Big Picture Strategy as the Market Reacts to the Fed
Bears have been so badly wrong for so long that they don’t have much credibility.
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Market action is mixed on Wednesday morning as investors await the FOMC interest rate policy at 2 p.m. ET. Breadth is good as small-caps (IWM), which benefit from lower interest rates, are trading up 0.7%. The Magnificent Seven ETF MAGS, which is more sensitive to the dollar, is trading down 1% and that impacts the indexes more.
As I discussed in my opening post, the Fed decision is going to create some volatility, and I expect sharp moves in both directions. But then what? Will it lead to a market top that produces some significant downside, or will it be a healthy shakeup that sets the stage for more upside?.
The bear case isn’t any mystery. Market pessimists have been arguing the same thing all year. So far they have been dead wrong about the negative impact of tariffs, they overstated the inflation risk, and their claims that President Trump will destroy the economy have been wildly incorrect. In my view, much of this is due to political dislike of Trump rather than astute analysis, but the irony is that the bears have helped to fuel the upside by creating short squeezes and a steady state of FOMO.
While the bears are still convinced that disaster awaits, they are focused more on valuation at this point. Many pundits and economists still claim that inflation is coming, and with employment weakening, there is a danger of stagflation.
The bullish scenario is that with lower interest rates, lower taxes, and Trump’s aggressive growth policies, the market is in great shape to continue higher. In addition, AI is still driving tremendous growth and still at a fairly early stage.
I try not to make predictions, but I am optimistic about a continuation of the uptrend. A higher level of volatility and some downside would be bullish, as it would shake out some of the complacency. It would be helpful to have a larger wall of worry to climb, although the bears have been so badly wrong for so long that they don’t have much credibility.
My game plan is to stay focused on price action and to look for opportunities to add to key positions if we have downside after the Fed announcement. Third-quarter earnings season begins in a few weeks, and I’ll be focused on names that are likely to have some positive catalysts in their earnings calls.
There are a lot of bears hoping for a major "sell the news" reaction to the Fed. I believe they will be disappointed, as there is likely to be an ample supply of dip buyers, and they are impatient to jump on some pullbacks.
At the time of publication, Rev Shark had no positions in any securities mentioned.
