This week the stage is set for an epic battle between the price-action bulls and the fundamental bears. The bulls have been enjoying a very strong run on high levels of liquidity and a belief in a Goldilocks economic environment. The hope is that inflation will continue to trend down, the Fed will be less hawkish, and there will be a soft economic landing.
The indexes have moved over key resistance levels, breadth has been very strong, and many market players have been caught wrong-footed. There has not been a strong negative reaction to earnings as many pundits and strategists have predicted.
The fundamentals bears are convinced that the bullish optimism is misplaced, and it is just a matter of time before the market recognizes that the battle against inflation is not yet over. There is substantial danger of slowing growth and a potential recession. Maybe the market has shrugged off mediocre earnings so far, but it is a matter of time before forward estimates and multiples start to fall.
The price-action bulls won the battle last week, but several major catalysts will drive the action this week.
First, this is the biggest week of major earnings reports. There are reports due from Amazon (AMZN) , Apple (AAPL) , AMD (AMD) , Meta Platforms (META) , Caterpillar (CAT) , and dozens of other key names.
Second is the Fed interest rate decision and a Jerome Powell press conference on Wednesday afternoon. There is a near 100% chance that the Fed will raise rates by 0.25%, but the debate will center on what happens next. It is currently anticipated that the Fed will raise rates by another 0.25% at the next meeting, but after that there is a strong disagreement between market expectations and what the Fed has been indicating.
The Fed will likely continue to sound quite hawkish but will the market believe what is said? The market has been fighting the Fed, and that fight will intensify this week.
The Third issue that the market will confront this week is extended market conditions. The bulls are celebrating strong momentum that is running over underinvested bulls and shorts, but how far can they run with earnings and the Fed news lurking? It is a classic 'sell the news' technical setup, and the bears are looking for an opportunity to reload.
Early on Monday morning there was some nervous action to start the week, but we will have to wait until Tuesday before the news begins to flow.
There is a big group of bulls that are celebrating the strong price action. They are looking to buy dips and pullbacks and are counting on a less hawkish Fed and a soft economic landing to keep things going.
There is an equally large group of economic bears that believe that this strength is just another counter-trend rally and that the bear market is far from over. They are looking for economic obstacles and an unfriendly Fed to keep the pressure on the market.
My game plan is to maintain high cash levels and stay highly reactive. I'm leaning bearish at this point primarily because the price action has been a bit too frothy, and the risk of selling into the news flow is high.
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