The market is being hit Monday morning with its third significant event in the past week. What has been most notable about these events is that they have produced movement not seen in years, but they occurred under the surface of the market and not had a major impact on the indices.
Last week, there was a major rotation out of high-beta momentum stocks and into growth and value names. It was one of the most significant shifts since the bubble burst in 2000. Also last week, bonds fell sharply after a bubble-like move in recent weeks. This also was a move not seen in years. And on Monday morning, market participants are seeing the biggest spike in oil since 2008 following a drone attack on Saudi oil fields.
The clustering of these major events so close together is highly unusual and reflects a tremendous amount of market uncertainty. It is a particularly interesting convergence heading into the Federal Open Market Committee meeting this coming Wednesday. It is highly anticipated that the Fed will cut rates a quarter-point, but expectations have fallen some from a few weeks ago. Some progress on China trade has helped to ease expectations for aggressive rate cuts.
The market is sorting out the impact of the spike in oil Monday morning, but so far the move in equities is relatively small. President Trump has stated that the U.S. will provide oil from its Strategic Reserve, which will help prices, and the potential for new supply from oil producers in the short term is good.
The spike in oil is bouncing bonds and precious metals back up Monday morning after both groups traded very poorly on Friday. Market players will be watching to see if support is now forming in those sectors as we head into the Fed news.
This trio of dramatic events in momentum stocks, bonds and oil has not roiled the market as many would expect. The most likely reason for this is that many market players have been expecting negative developments for a while, but they are not manifesting themselves as many anticipated. The bears have been looking for pressure on equities to occur as the market embraced the impotency of central banks. Instead, there has been this rotation, bond action and a spike in oil that no one saw coming.
I expect market players to spend the next couple days digesting this overwhelming news flow in front of the Fed announcement on Wednesday afternoon. The technical picture of the indices is still quite good and there seems to be some inclination to buy the dip that is occurring Monday morning.
My game plan is to manage positions and stay highly reactive. We will see how well the market digests the oil news this morning and we'll see how bonds act into the Fed. It is a very chaotic environment and we need to stay highly selective with trades.
