Carlsquare weekly market letter: Another leg down – or time for small caps?
18 Sep 2024
- All eyes are on the Fed decision today. Zooming in on the various indices, the Nasdaq and especially Nvidia are the focus of the market as tech is trading in a smaller and smaller range, building energy for a bigger move.
- The best way forward, perhaps counter-intuitively, is for the market to pull back from the FOMC decision. This would clear some oversold conditions in the market and pave the way for a Santa Claus rally starting in late September, early October. You don’t always get what you wish for, so let’s look at some alternatives. All eyes are on the Fed decision today. Zooming in on different indices, Nasdaq and especially Nvidia is the focal point of the market as tech is traded in a smaller and smaller range, building energy for a larger move
With the Fed clearly signaling a rate cut at this meeting, the market is speculating on the size of the cut. The odds have shifted to 63/37 in favour of a 50bp cut versus a 25bp cut. The Fed Funds rate is currently between 5.25% and 5.50%. Some are predicting a full percentage point cut by early next year, while others believe we could see a full percentage point cut by the end of the year, meaning two 25bp cuts and one 50bp cut in the remaining three FOMC meetings this year.
However, it is not the magnitude that is important, but the change in trend. Typically, Fed decision days are positive for the market. There is a tendency for the language in the statement to be a little more hawkish than expected. And then one hour later, Fed Chairman Powell speaks and is usually more market friendly (dovish) as he leads the dovish camp within the Fed.
The S&P 500 is now back on all-time-high. The risk aversive can use the hours before the Fed announcement to scale back.
The 10-year US Treasury yield has fallen into a support zone and is oversold. In the short term, this makes it easier for the yield to move higher than it is to move lower.
Comparing inflation expectations and interest rates, the market seems to be a little too enthusiastic, as interest rates have fallen more than inflation expectations.
Above we can see the big shift in the market in 2020 when bonds went down from a 30-year long rally. TLT as well as 20-year bonds are now down at support at the 200 month moving average.
Zoom in on Nasdaq and Tech and the market is building energy for a bigger move.
From a technical point of view, it is impossible to predict the outcome. We are still positive for the year, but you always must be prepared for pullbacks. It is better to wait for the breakout and trade the market from there. Tech is not at an all-time high and can give the S&P 500 another leg up if Chairman Powell can please the market.
NVDA has the same configuration as Nasdaq.
If the market is going to take off on the upside, there is going to be a lot of interest in investing in companies that have not participated in the bull market. Small caps are one part of the market that has lagged. Above is the S&P Small Cap 600. Note that it is trying to get ahead of the Fed decision as it broke out of the wedge yesterday.
Biotech (XBI) is another group of companies that could break up.
Oil trading is very complex, but as it affects everything else in the economy, it is always worth keeping an eye on.
https://www.tradingster.com/cot/legacy-futures/067651
Speculative positions in oil are at extreme levels, indicating that people are positioning for a continued negative trend in oil. However, this also makes the trend vulnerable to a rally as many positions will have to be closed.
Oil is trying to recover from the fall. From a technical perspective, a test of the lower trend line is in the cards.
A rise in interest rates, the USD and oil prices would be a toxic cocktail for the market. So let us see how the market reacts to the Fed’s decision. It is not what the Fed or Powell says that is important. What matters is how the market reacts.
September is usually the weakest month of the year. With a US presidential election, that may not be the case. But whatever happens, expect a lot of movement as it is a traders’ market.
Happy trading!
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