It has been a disappointing week as the market has been unable to generate any positive momentum on good news and some gap-up opens. The problem for weeks now has been that strength is being used as an opportunity to escape this difficult market.
One of the problems this week is that expectations for a bounce into the end of the year has been quite high. When it doesn't develop as anticipated it creates a large supply of stuck bulls that add to the selling pressure as disappointment sets in.
Next week we are going to have this dynamic in play again but there are a couple issues that will add a little additional uncertainty.
First is that technically the indices, and many stocks, are hitting oversold levels at the same time that sentiment is also hitting very high levels of bearishness. From a contrary standpoint the argument is that there aren't that many aggressive sellers left but that is a tough thing to time.
In addition to being oversold we also have a potential catalyst in the form of the FOMC interest rate announcement on Wednesday at 2 pm ET. Currently the market is pricing in about an 80% chance of a ¼ point rate hike but the main focus will be on the policy statement and what it says about the potential for hikes next year.
Chairman Powell has already indicated that he is taking a more dovish approach but the likelihood is that the policy statement will reiterate that the Fed is 'data dependent'. I'm not sure that will be enough to calm the market but it is clear that the Fed is growing concerned about the market action.
Next week we should also hear quite a bit about tax loss selling. With the indices now down or close to flat for the year there may not be that many gains left to offset but there is always some harvesting of tax losses in stocks that have been acting poorly.
The most important thing to keep in mind right now is that this is a poor market, the price action is weak and individual stock picking is not working well. Even extremely short term trading is tough in this environment so caution is the way to go.
Stay open minded, flexible and reactive. This is bear market action and capital protection is paramount.