After a sharp spike higher by the market on Wednesday afternoon following a speech by Fed Chairman Jerome Powell, the big question on Thursday is whether it can build more momentum as we head into the end of the year.
The thing that was most notable about Powell's comments on Wednesday was his slightly less hawkish tone. He did not announce any new policy changes but did acknowledge the likelihood of a one-half percentage point rate hike at the next Fed meeting in two weeks and the potential for smaller hikes for a longer period of time.
Powell also acknowledged that the battle against inflation is shifting away from issues such as food, rent, real estate and autos and now is focused more on wages and employment. The job market remains far too strong for the Fed to feel that it has control of the inflation issue. It still needs to slow the economy to bring it under control.
The market was looking for a reason to celebrate and ended up with a positive narrative that helps to create conditions for more upside into the end of the year.
The biggest obstacle to the market has been the chaotic macroeconomic environment, but Powell has provided a clear path for the Fed and there isn't any immediate economic news to disrupt the bullish story right now. There is jobs news on Friday that will move the market, but the next important economic news is the November Consumer Price Index (CPI) report on Dec. 13 and then the Federal Open Market Committee (FOMC) interest rate decision the next day. There are not too many obstacles to a positive trend for the next week or so.
The bears are arguing that this celebration of Powell's comments is unwarranted. Nothing has really changed. The fight against inflation is far from over, and the danger of a recession is building.
Strategists at J.P. Morgan just issued their prediction for the year ahead and are predicting that the market will slump in the first half of 2023 and retest the lows before the Fed finally pivots away from its focus on inflation.
The question for traders is whether the market can generate end-of-the-year seasonality and trend higher for a while longer. The bulls are convinced that poor positioning will help to put some bids under stocks, but the next CPI report will be a major hurdle.
We have a little pause here on Thursday morning as yesterday's gains are digested. Watch to see how aggressive dip buyers are on a pullback. Plenty of folks missed the move yesterday and will be looking for entries on weaknesses. The key issue is how much giveback there will be before support occurs.
