A V-Shaped Bounce Is Developing as Shutdown Deal Materializes
Even with a reopening of the government, there are still headwinds that will lead to increased volatility.
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Following the worst week of market performance since the April tariff scare, the market is set to open higher early Monday morning. The bounce that began at midday on Friday is gaining traction on indications that a framework to end the government shutdown is developing.
There are still procedural hurdles to overcome to cement an agreement, but the necessary votes are in place. This deal not only removes some economic uncertainty but will also allow for the collection of essential data, such as CPI and PPI, which are due this week. Those reports will likely be delayed, but the resumption will help clarify the likelihood of a Federal Reserve interest-rate cut in December.
Even with a reopening of the government, there are still headwinds in place that will lead to increased volatility. The biggest issue is that concerns about valuations in the AI sector are taking hold. The argument has been out there for a while, but was not taken seriously until the Magnificent Seven (MAGS) names reported and AI star, Palantir Technologies (PLTR) , sold off on a good report. There is a bounce Monday morning in AI names, but overhead resistance is lurking. It is going to take some effort for the AI group to return to the highs it was hitting just two weeks ago.
Earnings season is quickly winding down, with mainly smaller companies and Nvidia (NVDA) left to report. There has been quite a bit of sell-the-news action on certain strong reports amid market conditions, but that has created bottom-fishing opportunities for traders.
Another issue that is bubbling up is the high level of layoffs that has been taking place. The employment market appears to be cooling quickly, which will influence the likelihood of a Fed rate cut on December 10. Fed Funds futures indicate a 65% chance of a cut, but weak data would push those odds higher, providing market support.
China has loosened some restrictions on rare-earth minerals, helping boost sentiment, and there is also the specter of positive seasonality to end the year.
Buyers are busy early on Monday. If they stick around for a while, it will create short-squeeze pressure and spark fear of missing out. A V-shaped move could develop as traders scramble to add risk.
At the time of publication, Rev Shark had no positions in any securities mentioned.
