After a strong run, the market was set for a little corrective action to work off overbought conditions. Many market players have been anticipating that Federal Reserve Chairman Jerome Powell's speech here on Friday at Jackson Hole would be a likely catalyst. Powell is scheduled to speak at 10 a.m. ET.
There has been increased chatter recently that the Fed is about ready to start tapering its buying of bonds. On Thursday, several Fed members expressed their support for tapering and the stage is set for Powell to provide more details about what the timing might be.
The conventional wisdom is that a less accommodative Fed would be a market negative, but this action has been anticipated for a while. In addition, fears about inflation have cooled even though the Delta variant of COVID has not had that much negative impact on economic growth so far. The economy also has been hindered by supply chain issues and shortages of employees, which is helping to keep the Fed a little less hawkish than it might be otherwise.
The big issue today is whether the Powell speech will be a catalyst for more corrective action. It is unlikely that he is going to say anything that will shock the market, but even well-anticipated Fed news is often a trigger for movement when it actually occurs.
The selling that occurred on Thursday was partially due to the events in Afghanistan but also was due to the anticipation of a "sell the news" reaction to the Fed. Market participants are always looking for a sell-the-news reaction to the Fed, but more often than not we end up with a positive reaction instead. I've often written that the market loves to love the Fed and it tends to look for reasons to react favorably to whatever moves are made.
Four Fed members have signaled that they are supportive of tapering bond buying as soon as October, so it would be a surprise if Powell does not indicate that is likely. The market knows this, yet it is seeing early strength and does not look very concerned.
While we will see a reaction in the indices to Powell, there is another aspect of interest to consider. There has been better speculative trading under the surface lately, and many small-caps, growth stocks and speculative names finally have found support after downtrends that started back in February. These stocks still have a ways to go before they are even close to prior highs. There has been much better stock-picking and trading action in these stocks, but it is still narrow and there is nervousness that another bout of rotation will hit.
I believe a pullback in these small stocks at this point will be a good opportunity to increase positions. If the market sees weakness on the Fed today, then I will be working on my shopping list.