With a very important Fed interest-rate decision coming up on Wednesday afternoon, the logical move for the market would be some choppy action, as investors moved into position for the reaction to Fed Chair Jerome Powell and his crew. Instead, the day turned into another blood bath for shorts and underinvested bulls. The market traded steadily higher all day and then blasted even higher in the financial 30 minutes of the day.
Some bears were looking for an unwinding of some bullish plays or shifting allocations to hit in the final minutes of trading for the month of January, but it turned out to be just another wild ramp higher.
The bears are absolutely convinced that this action is unjustified and that the Fed isn't going to be nearly as dovish as some bulls seem to hope, but this is action that has very little to do with fundamentals or the economy. This is all about the flow of funds and positioning between equities and bonds. In the fullness of time, it will shake out, and there will be a more careful examination of valuations, but that just isn't happening yet.
This action is creating the likelihood of some very big moves when the Fed news hits tomorrow. It is a classic sell-the-news situation on the one hand, but there are some folks way out of position on the other hand if the Fed sends a dovish message. The market has been fighting the Fed for a while now, and it would not be a shock if Powell sent another terse hawkish message like he did at Jackson Hole.
I'll review some potential trading scenarios in the morning, but I think it is safe to assume that there will be some very sizable moves.
Have a good evening. I'll see you in the morning.
