The market is starting to slip a little as we await the Fed fireworks at 2 p.m. ET, followed by Chair Jerome Powell's press conference 30 minutes later.
Many bears are expecting Powell will strike a hawkish tone that will disappoint investors, but the market has acted very optimistic into the news, and bulls will be hunting for a positive twist.
The essence of the debate right now is that the bulls seem to believe that the Fed can tame inflation, manufacture a soft landing, and cut interest rates by the end of the year. The bears argue that this is a ridiculous expectation, and the market will recognize that sooner or later. When the market does figure out that the Goldilocks scenario is a pipe dream, then the likelihood is that the market will retest lows. We will have some clues in a couple hours, but this debate will continue for quite a while.
The main thing I will watch as the market digests the news is how correlated the market action becomes. Fed-driven action tends to occur on lopsided breadth as everything is bought or sold. Fundamentals and the individual merits of stocks don't matter much when there is macroeconomic movement hitting the market.
I will be watching some of my favorite names to see if they are sold off with the broader mark if there is a downside move. We still have plenty of small-cap earnings reports to come in the next few weeks, and those stocks will react to earnings news.
I also want to watch for sector rotation and themes. We should see some shifts in money flow when big-cap technology shows stronger reactions to the Fed news.
Interestingly, this Artificial Intelligence theme is gaining quite a bit of traction lately. There has been some strong speculative action in select smaller stocks, which doesn't tend to occur much in bear market environments. Traders are hunting for action and are creating some. I think that could continue even if there is a negative reaction to the Fed.
I prefer to trade the volatility after the Fed news, rather than try to predict what the initial move might be. The bears are confident that we will see a negative reaction, but they are going to provide some significant upside pressure if they are wrong.
