The market is drifting lower on Tuesday as traders await a speech by Fed Chair Jerome Powell at the Economic Club of Washington at 12.40 p.m. ET.
Breadth is running more than two to one negative, and the pockets of hot action have dried up. Artificial Intelligence (AI) has been a hot topic, but it is quiet today, and there are only about a dozen stocks making moves of 10% or more.
After the big run in January, the market is at a very important juncture. The reaction to the comments by Powell will provide some clues as to where things are heading.
I've characterized the recent market battle as being between the price action bulls that have embraced a Goldilocks economic theme and the economic bears that are convinced that the market is currently ignoring a slew of negatives.
The bulls have benefited from poor positioning, which has caused aggressive short-covering and pulled in some idle money from the sidelines. The bears were overconfident about their fundamental arguments, and when the market held up very well during earnings season, they were trapped.
Earnings season has been mostly mediocre, and the odds of more interest-rate hikes have been increasing, but the bulls are focused on better technical action, positive breadth, a paucity of new 12-month lows, and generally good price action. As I've discussed, there has been some better stock-picking lately, and the pockets of speculative action have been expanding.
The market has had a good run and is due for a rest, but will it turn into a deeper correction when Powell reminds the market again that the battle against inflation is not over? There has been increased optimism that a recession can be avoided, but what happens when interest rates go higher, and the Fed finally does produce the higher unemployment that it is seeking?
We are at the point now where bulls will have to decide if they are going to continue to embrace the bullish technical action or if they are going to start worrying more about a hawkish Fed and the potential that the Goldilocks economic scenario may not come to fruition.
That won't be decided today, but the reaction to Powell is going to provide some insight into a potential shift in the market mood.
