Volatility Set for Rise as Fed Prepares to Cut Interest Rates
Next week's Federal Reserve interest rate cuts are facing a "sell-the-news" setup.
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Market action was mixed on Friday, with momentum slowing but good underlying support. More than 65% of stocks declined, but there were some pockets of outstanding action in names like Tesla TSLA, Rocket Lab RKLB and Walmart WMT.
After leading on Thursday, the Russell 2000 small-cap index (IWM) lagged on Friday with a loss of 0.8%. The number of new 12-month highs hit around 215 names, which is surprisingly sparse for a market with the indices at all-time highs.
The action was a good example of my thesis that strong markets tend to stay sticky to the upside and don't suddenly collapse. The folks who are underinvested and missed the move are now staunch dip-buyers who will buy even shallow pullbacks. They won't go away at the first sign of weakness.
The Federal Reserve will be issuing its policy decision next Wednesday, September 17, at 2 p.m. ET. Fed fund futures indicate a 100% chance of at least a quarter-point cut.
Technically, the Fed interest rate decision will be a classic "sell-the-news" setup. I suspect that there is likely to be some profit-taking in front of the decision by traders expecting a rate cut to trigger selling.
JPMorgan's JPM trading desk put it this way: "Next week's Fed could become a 'sell-the-news' event as investors consider the macro environment, stretched positioning, weaker corporate buyback bid, waning retail investor participation, and quarter-end rebalancing. If this comes to fruition, look for a 3-5% pullback."
Of course, when a trade appears this obvious, there is a higher chance it won't work, but elevated volatility is a very likely outcome no matter what happens.
Have a great weekend. I'll see you on Monday.
At the time of publication, DePorre had no positions in any securities mentioned.
