The market managed some late-day strength on Monday, which resulted in decent gains for the indexes, but the focus of market participants is on the Fed interest rate decision, so the action should remain choppy.
It is well-anticipated that the Fed will raise rates by at least 75 basis points on Wednesday, but the big issue is whether that hike already is priced to a great degree. The response will depend largely on the Fed's policy statement and the comments of Chairman Jerome Powell, but a sizable hike is not going to be a surprise.
There have been two big news events in the last month that saw market run-ups into the news. The first event was the Jackson Hole speech by Powell, and the second was the August Consumer Price Index report. There was optimism about positive outcomes going into both, but in both cases the market was dead wrong.
Bulls bought in front of the news based mainly on the argument that all the bad news was already in the market and there was a good chance of something positive. There was hope that Powell might indicate a slight dovish pivot, and there was hope that falling energy prices would drive down the numbers in the CPI report. The market was wrong both times, and the poor positioning in front of the news made for a more painful response when the disappointing news hit.
The current situation is somewhat similar. There is hope that the Fed may indicate a slight inclination toward a dovish pivot, and the bulls are talking about how negativity is extreme and that we have already priced in the worst.
Bonds don't seem to be buying the argument that we have already priced in the higher rates as yields continue to trend higher. The 2-year Treasury yield pushed over 4% here on Tuesday morning before reversing.
The great difficulty for market players is that, in the short term, the market can be very irrational. The bearish narrative here is painfully obvious. Inflation is not under control, the Fed has shown no signs of tempering its hawkishness, and as FedEx (FDX) illustrated, there are signs of economic slowing. Another negative was illustrated Monday night by Ford Motor (F) , which indicated that supply shortages and inflation would cost the automaker around $1 billion. There isn't much the Fed can do about the supply chain.
Despite the obvious negatives and partially because they are so obvious, it would not be too surprising to see some market upside in front of the Fed announcement. Part of that is short covering and much of it is just short-term trading, but just because the bear case is obvious doesn't mean the market will go straight down.
We are seeing weak action again ahead of the opening bell, but dip buyers have been inclined to jump in recently. It isn't meaningful action, but don't expect a lot of logic right now.