Following the dramatic events in the banking sector this weekend, the market is seeing a reversal of the rotational action that was occurring last week.
Big-cap technology had been leading to the upside, while the S&P 500 was nearly flat and the Dow Jones industrial average and Russell 2000 were lagging. But Monday morning big-cap technology was reversing back down with a drop in the Nasdaq 100/Invesco (QQQ) , while the Dow and Russell 2000 (IWM) are enjoying relative strength. Bank action is mixed, but the good news is that SPDR Regional Banking ETF (KRE) is bouncing by 3.6%. Breadth is running around 2 to 1 positive, and the number of new lows has declined to around 200.
Overall it is a positive action, and the longer it lasts, the more likely it will attract more buyers that are worried about being out of position and missing out. The problem is that the Fed interest rate decision hits on Wednesday afternoon, and there really is no way to anticipate what sort of reaction that will receive.
The chances that the Fed does nothing on Wednesday have declined this morning to around 27%, and there is a 73% chance of a quarter-percentage point rate increase. Goldman Sachs said this morning that it doesn't expect a hike due to the banking crisis, but there is a view that the Fed will stick with a quarter-percentage point hike so they will not be viewed as panicky or unconcerned about inflation.
Several big names strategists, such as Mike Wilson at Morgan Stanley, have stated that they believe that the next leg down in the bear market is starting. The thesis is that the banking crisis has sent the message that earnings estimates are too high, and the market will start to price that in.
We have heard that thinking before, and it led to a very energetic short squeeze, and there are plenty of bulls with liquidity that would like to make that happen again.
Most of the charts that I'm looking at right now are a mess, and I don't see any reason to put cash to work. The price action bulls are doing a nice job, but the economic bears have some very strong arguments. I'm not going to fight the positive price action, but I'm not going to chase it either.
While the news flow has been very dramatic, it is not created the sort of opportunity that I want to see at this point.
