When the market has run up for a couple of weeks into a major news event it is logical to believe that there might be a "sell the news" reaction. The theory is that that market has already priced in or discounted the news and therefore there will be an inclination for some market players to lock in their gains as further upside is limited.
While the theory is simple, its application can be difficult. Since most sophisticated market participants are very well aware of this theory there is a high level of gamesmanship. Traders are always looking for an edge and that often means doing the opposite of what is expected.
There are two major news events Wednesday that present potential "sell the news" setups. The first is the Federal Open Market Committee (FOMC) interest rate and policy decision and the second is earnings from the largest stock in the market Apple (AAPL) .
The odds that the Fed will cut interest rates a quarter-point this afternoon are around 97%. That cut has been signaled by Fed members in various ways and the market will be shocked if it does not occur.
What is in question, however, is whether there will be another cut in December. With the S&P 500 at all-time highs, no clear signs of the much anticipated recession and some progress on China trade, there is good reason for the Fed not to cut rates again right away.
It is very likely that Fed Chair Jerome Powell will indicate that the central bank remains "data dependent" and will provide no clear signal at this time about what may happen next. The policy statement and the press conference will be sliced and diced by pundits but it could be there won't to be any clear signal about the next potential rate cut.
This sounds like an ideal setup for a "sell the news" reaction but with Fed decisions that kind of reaction is always so obvious it doesn't often develop. The more likely scenario is that there are buyers lurking to jump on any weakness. If there is a gap-up on the news it often loses momentum quickly unless there is some truly surprising news.
I'll have more later on the potential reaction to the Fed but the important point is to not expect a simplistic "sell the news" reaction.
Apple earnings present a different sort of situation. It is a company-specific rather than a macro-economic event and the reaction won't necessary spill over to the entire market.
Recently Apple has been a "go to" name for market participants trying to put money to work very quickly. It is the ultimate "risk on" stock. It has become technically extended over the past two weeks but finally saw a 2.3% pullback on Tuesday.
Expectations for Apple are very high and if execution and guidance are not perfect there will be some quick selling. However, the power of Apple is that is regarded as a "safe" stock. It is Warren Buffett's largest position, Jim Cramer says hold it, don't trade it and for many investors, it has been their best investment ever. It isn't a stock that tends to be dumped due to a single earnings report.
The overall market is in a difficult position right now after a great run. That doesn't mean it is suddenly going to reverse and go straight down. That is highly unlikely. What is most likely is some increased volatility and consolidation. We are heading into the strongest time of the year now and the best thing that could happen is a pause that helps build a foundation for another push higher.
"Sell the news" is the phrase of the day but it is never that simple.