Shorts Will Have to Cover After Failed Fed Decision Setup

The Federal Reserve cut interest rates a quarter point on Wednesday as expected and maintained the likelihood of three more cuts at subsequent meetings. The decision was not a surprise, which helped to keep volatility contained. There was the typical whipsaw action as the news was digested, but at the closing bell, the S&P 500 was nearly flat while the Russell 2000 Small Cap Index gained 0.33%. Market breadth was very close to even, and there were 230 stocks hitting new highs.

As I’ve been discussing the last few days, a "sell the news" reaction was too obvious to work well. It was a good setup for some selling with the indices extended and the news very well anticipated, but investors saw it coming and were happy to buy the minor dips that occurred on some volatility swings.

There is quite a bit of disagreement among Fed members about the level of dovishness, which means that upcoming economic data will continue to be a key catalyst for the market. There is concern that growth and tariffs will drive inflation, but at this point, Fed members are willing to overlook that risk and focus instead on slowing in the employment market.

It probably would be healthier if the market pulled back on the Fed news and shook out some nervous bulls, but positive momentum is too strong, and there is too much support for much downside right now.

We’ll see how things develop on Thursday after the Fed news is digested overnight, but the uptrend remains intact, and there is no rush to cut market exposure. The failure of the sell the news setup will force some shorts to cover.

The bears will continue to tell us this is irrational action with stocks overvalued and extended, but the trend is your friend until it ends. Stay focused on the price action.

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

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