Market conditions are very good for a strong move this week when the Federal Open Market Committee (FOMC) announces its interest rate decision and policy statement on Wednesday at 2 p.m. ET.
A rate cut is not expected at this meeting, but odds of a cut in July are increasing and the market will be watching closely to see if the Fed removes the word "patient" from its policy statement.
The indices moved straight up over six days in early June on dovish comments from Federal Reserve Chairman Jerome Powell. There is anticipation of at least three cuts before the end of the year, but last week the market cooled off and consolidated the outsize gains. The indices went from the best week of the year to one of the narrowest as the debate over an extremely dovish Fed intensified.
The bulls have benefited so much for so long from a friendly Fed that a positive response to the prospect of cutting rates is automatic. Any hint of a rate cut generates a positive response because it always has. It has been foolish to stand in the way of the most powerful force in the market.
However, the bears have been growing louder about how rates are already at very low levels and that the Fed only has limited ammunition. In addition, we are now at a different place in the economic cycle and the repercussions of rate hikes are likely to be different as we enter a period of slowing growth.
We'll have quite a bit more to talk about in regard to the Fed in the next few days, but the most important thing to know right now is that the technical conditions are very good for a big move on the news. The technical pattern suggests an upside resolution, but there is overhead at the May high and if the 50-day support falls it is going to cause great consternation.
There has been some good trading action recently with a number of very hot initial public offerings (IPOs) and some good stock picking, but the bearish narrative is hard to ignore. Trade wars, a slowing economy and political issues are looming. Commerce Secretary Wilbur Ross just warned that we shouldn't expect a trade deal at the coming G-20 meeting.
The market has been very sanguine about the China trade issue over the last couple weeks primarily because it is comforted by a dovish Fed. That issue will come into much sharper focus on Wednesday and will determine where this market is heading next.
We have a mild positive open on tap to start the week but it is likely to be slow trading as we await the Fed.