Conditions were good for some volatility on comments by Fed Chair Jerome Powell, but the market outdid itself with some wild swings. At the closing bell, it turned out to be a very solid day with positive breadth and the Nasdaq jumping almost 2%, but it was a wild ride.
The day started off with very lethargic and mixed action. The speculation on artificial intelligence cooled off, and there were very few pockets of speculative action. Traders were standing on the sidelines, waiting to see what Mr. Powell had to say.
As soon as Powell said the word "deflation" the indexes blasted higher. There really wasn't anything new or surprising in the comments. In fact, they were more hawkish than dovish, and it was quite clear that the Fed was still concerned about employment-related inflation and that a few more rate hikes were on the way. It has been very clear for a while that inflation has been trending down, but the market gets giddy when Powell acknowledges that fact and mentions deflation in about 25% of the economy.
The euphoric reaction to Powell doesn't make much sense, but what has been driving the market more than anything recently is poor positioning and shorts rushing to cover positions. They are convinced that economic problems lie ahead, but the price action is crushing the skeptics.
What was particularly notable about the action on Tuesday was the huge swings. The indexes blasted higher initially on Powell, reversed and made new intraday lows, and then reversed again and hit a new high. There wasn't any news or logical reasons for this volatility, but it reflects how the action is driven more by things that have nothing to do with fundamentals or the economy.
The bears are out of position again, and the bulls have momentum, but the comments by Jerome Powell did not deserve this level of celebration.
Have a good evening. I'll see you tomorrow.
