Poor communication by members of the Federal Reserve jerked the market around last week, but it is now quite clear that the Fed is likely to announce a quarter-point cut when it announces its interest rate policy on July 31. Market players were misled by comments from the President of the NY Fed, but the Fed issued a statement that made it clear that a half-point cut was unlikely.
The Fed prides itself on transparency, but all the talking heads managed to do with their constant talk is confuse the market. The market has not priced in a half-point cut and that resulted in some euphoric buying on Thursday, which was reversed on Friday. The issue now is whether a quarter-point cut is already fully discounted. That seemed to be the case in view of the pullback that occurred on Friday.
While the market waits for the Fed announcement, it is entering the meat of earnings season. So far, it has been generally ok with financial stocks holding up and a very strong report from Microsoft (MSFT) offsetting a weak one from Netflix (NFLX) . However, both IBM (IBM) and Microsoft reversed intraday following their reports and closed at the lows after strong starts. Market players were unwilling to aggressively chase what was very good news, particularly in the case of Microsoft.
The question is whether this is going to be a continuing theme. Will good reports be an opportunity for selling? With the indices hovering close to highs and the potential that dovish central banks are already discounted, there is the potential for more "sell the news" action.
Trade issues have been cited by the majority of companies reporting so far as an issue and will likely be the excuse used if expectations are missed. There is some movement in the trade negotiations with China as they are requesting some ability to buy U.S. agricultural goods in exchange for some easing on tariffs on technology products. There is still a long ways to go before there is any sort of deal, but the market will like to see some movement.
Technically, what has been most notable about the action recently is the low volume and limited movement. Despite the Fed drama, earnings season and trade issues, there has been limited volatility. Market players seem complacent and are confident that the dovish Fed will keep the market chugging along. There has been concern about slowing growth but that has been offset by the hopes for aggressive rate cuts.
The indices are still in an uptrend but have seen some distribution lately. There has been poor performance in smaller-caps, which is a reflection of some fear of aggressive speculation but selective stock picking is still producing some decent results.
This market is not wildly bullish, but it isn't falling apart either. We have some minor strength to start the day but the reaction to earnings reports this week will tell the tale.