Selling Momentum Slows, But This Is a High-Risk Market
The selling trigged by the Federal Reserve failed to gain momentum in the stock market today.
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The S&P 500 suffered a minor loss on Thursday but the important takeaway is that the ugly selling triggered by the Federal Reserve on Wednesday did not gain momentum.
The mood was very sour at the open and then the market thrashed through a choppy session before some late buying emerged. In view of where things stood on Wednesday afternoon, that qualifies as a mild victory.
The Russell 2000 (IWM) was the leader with a gain of 0.8%, which is particularly encouraging because small-cap strength signals some appetite for higher risk. The Magnificent Seven (MAGS) lagged with a loss of about 1%, driven primarily by confusion about the AI sector after Micron Technology's (MU) blowout earnings report produced a negative reaction.
It is not unlike what happened to Nvidia (NVDA) after Jensen Huang discussed $1 trillion in revenue at the GTC conference. The numbers are very impressive but the market is struggling with valuation in a high uncertainty environment. Spectacular results are getting sold rather than bought and that tells you something about where investor confidence stands right now.
As I discussed on Thursday morning, part of the reason Thursday's action was more contained is "degrossing" by large hedge funds. They were simultaneously covering shorts and reducing longs in reaction to the S&P 500 breaching a key technical level and a desire to carry less exposure into continued volatility. It is risk reduction, not a directional bet, and it helped keep the market from cascading lower.
The mood improved by the closing bell but there is no reason to believe the worst is behind us. There will be a steady diet of Iran and oil headlines that will keep jerking the market around and there will very likely be more negatives before we see a meaningful positive catalyst.
Investors will worry about missing a turn and that anxiety will push some to buy too early. The folks who bought on Monday know exactly how that feels right now. Patience remains the name of the game.
Have a good evening. I'll see you tomorrow.
Related: Wall Street Turns on India as Oil Shock Drives 'Unprecedented Crisis'
At the time of publication, DePorre had no positions in any securities mentioned.
