The Smell of FOMO and Short-Covering Are in the Air After Fed Rate Cut
Once again, the bears are trapped by a failed sell-the-news setup.
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Since the market low in April following Liberation Day, a recurring theme has been better-than-expected economic news. Each time new data are released, the bears have been hoping that even though it is good news, it will create a sell-the-news reaction because it is anticipated and the indexes are extended.
It hasn’t happened.
Again and again, good news is viewed as positive and keeps the uptrend running. There never seems to be a point where the positive developments are already fully discounted by the market.
The same scenario occurred again on Wednesday when the Federal Open Market Committee cut interest rates by a quarter-point, as anticipated. Everyone knew it was coming, and with the indexes hovering at all-time highs, it was an ideal sell-the-news setup. The problem was that it was too perfect and too obvious.
The initial reaction to the Fed decision was a few mild swings and a slightly positive close, but on Thursday morning, the indexes are gapping higher, and there is the smell of short-covering and FOMO in the air.
The bears failed to get the response they wanted on Thursday, and now they have little choice but to reposition and wait to try again. Trying to call market tops is a very dangerous and costly game.
While the market continues to look quite good technically, the bulls still have plenty of challenges. Many stocks have been on great runs and still have positive momentum, but they are technically extended, and new entry points are difficult. While that doesn’t mean that they are going to collapse, some consolidation is needed to set up conditions for more upside.
If there is another big run-up into third-quarter earnings, then we will have the same sell-the-news conditions in place once again a month from now. I’m hoping we have some choppier action that reduces the overbought technical conditions, but it has been very dangerous to underestimate the strength of the market and the pockets of momentum.
We have a strong gap-up open developing on Thursday morning.
At the time of publication, Rev Shark had no positions in any securities mentioned.
