The market is quiet this morning as it awaits the Federal Open Market Committee's interest rate decision and a press conference with Fed Chair Jerome Powell. The key issue isn't whether rates will be hiked but the timing and the extent to which the Fed will begin to taper off its buying of bonds and other financial instruments. Tapering has been well anticipated, but the details and the manner in which it is framed by Powell will have an impact on the market reacting.
The Fed decision occurs as the major indices have become increasingly extended. It is a good setup for a 'sell the news' reaction, but that is always problematic when it comes to the Fed. The market loves to love the Fed and has a tendency to shrug off a negative reaction rather quickly. Perhaps it is just too obvious to sell Fed news, but unless there is something very surprising and very hawkish, the market usually deals with Fed news in a positive manner.
A more important issue for market players will be the rotational action that has been occurring recently. Small-caps jumped sharply higher on Monday as the Russell 2000 ETF (IWM) came close to a breakout but paused on Tuesday as some profit-taking and repositioning took place.
Big-cap technology stocks are often more interest rate sensitive than other areas of the market because they are more sensitive to discounted cash flow over a long period of years. Much of their valuation is derived from future earnings, and future earnings are worth less today if interest rates are higher.
If big-caps are hit by inflation worries or higher rates, that may supply some fuel for greater rotation into small-caps. The Russell 2000 is set up very well for more upside into the end of the year, and many stocks also have favorable technical setups. We are now moving into small-cap earnings season, so there will be quite a few big movers as news hits.
The biggest market positive right now is that there continues to be strong interest in stock picking and speculative trading. The macro issues are not having much impact, although the Fed decision today is going to provide a little additional volatility.
Election results last night favored Republicans and may make it a harder for Democrats in Washington to advance their agenda. The market tends to favor gridlock, and there is more of it after the events last night.
So far, it is quiet out there this morning, and it is likely to stay dull until we have the Fed out of the way at 14.00 ET.