Since the lows hit in October, the primary issue that market players have been contemplating is the likelihood that the Fed will raise rates by 0.5% rather than 0.75% at its next meeting on December 14. The reduction in the level of rate hikes is about an 80% certainty at this point, and that has been the basis for much of the recent market strength.
The bullish narrative is that a less aggressive Fed and cooling inflation combined with positive seasonality and poorly positioned market participants would help the market cut through increasingly tough overhead resistance, but the headwinds are growing stronger, and the risk of downside is building.
The primary issue is that the Fed may be more market-friendly in the short term, but it is growing less friendly in the long term. Fed Chair Powell made it clear that the main issue with inflation is related to jobs and wages. That fear was illustrated this morning as the ISM Services Report was quite a bit stronger than anticipated. This was a good report, but the bad news is that it gives the Fed the ability to be even more aggressive with rate hikes in the future.
The bulls are focused on the positives in the short term, but the bears are focused on the negatives in the longer term. The economic issues that have plagued the market all year are far from resolved, and the smaller rate hike than expected in December is not going to do much to keep positive sentiment building.
Breadth this morning is poor at around 4 to 1 negative. There are very few pockets of strength as China and oil names have reversed after gapping up. One bright spot is cannabis-related names (MSOS) , but small caps (IWM) are lagging badly, with a loss of 1.87%.
The battle between the short-term bulls and long-term bears is shifting, with the bears gaining some traction. It is time for increased caution.
