After the sharpest intraday drop of the year following the Fed policy announcement on Wednesday, the big question that investors must address today is whether that action marks a significant turning point or will it be just another dip-buying opportunity?
There is some bounce in the indices this morning as European markets took the poor action in the U.S. in stride. However, strength in the dollar is keeping precious metals and some commodities under pressure. Bonds are pulling back after a spike but the inverted yield curve continues to flash warning signs.
While there appears to be some support this morning the market's biggest problem right now is a lack of catalysts
Earnings season is winding down with the main focus now on smaller cap stocks. Virtually all the bigger, more important names have now reported. The Apple (AAPL) report was solid but was almost immediately forgotten in the frenzy over the Fed.
The good news is that small-cap earnings can provide some great trading opportunities. A good example is Enphase (ENPH) which jumped 30% yesterday on a very strong report. The solar sector is of particular interest as more in that sector are reporting soon.
Earnings season didn't turn out to be the disaster of slow growth that many bears predicted but it no longer is going to be of much help to the bulls either.
Without earnings to drive the action the focus will be on economic news. The China trade situation is on hold until the next meeting in September, and August is peak vacation time and one of the slowest months of the year. We will be relegated to speculating whether there is enough economic weakness to increase the Fed level of dovishness.
The market continues to expect a rate cut at the next Fed meeting but Jerome Powell ruined the party with comments about the current easing just being a temporary course correction. The market's anticipation of rate cuts has fallen sharply and that means that many market players will now be rooting for economic weakness to increase the Fed's dovishness.
Technically, the sharp drop on higher volume yesterday did some damage. The uptrend is still in place and there is support around 2975 of the S&P 500 but it is precarious at best. A test of that area after the open has a good chance of failing.
My cash levels have been rising recently as I've taken profits and have found fewer places to redeploy that capital. I will be focused on the dozens of small caps that have yet to report earnings and expect to find some opportunities even if the broader market struggles from here.
Some increased caution is warranted at this point. Watch for retests of the recent lows. If they do not hold there is a fair amount of risk to the downside.