Following a very strong run in January, the market has been hit with two days of selling but is still holding above key support levels.
The bulls have run over the economic bears that were predicting that earnings season would trigger concerns about a slowing economy and trigger another downside move that would test the 2021 lows. That only did not happen, but it set up conditions that trapped the bears and caused a tremendous short-squeeze and a rush to put idle capital to work.
The bulls have justified this action with the argument that inflation is coming down and is not too hot while, at the same time, employment is still very strong, so the economy is not too cold. It is a Goldilocks economic situation that will support a further market rally.
The bears have not given up, though. Their view is that the bulls are simply denying reality. The Fed not only remained hawkish, but the chances of several more 0.25% interest rate hikes have increased. The market is still betting that the Fed will cut rates slightly by the end of the year, but there is growing confidence that the Fed really will be able to deliver a soft economic landing despite more rate hikes.
The economic debate will heat up again Tuesday when Fed Chair Jerome Powell speaks around midday. It is unlikely he is going to say anything new or surprising, but the primary focus will be on his tone and messaging. The Fed remains data-dependent, and the extremely strong employment numbers on Friday were a major surprise.
The bulls have primarily focused on the comment that Powell made about the "disinflation" process starting. That was the basis for the euphoric response last week that caught the shorts and underinvested bulls by surprise.
We will see if Powell can do damage to the current market optimism, but the bulls are doing a good job of producing positive momentum and shrugging off the bearish arguments. One of the biggest positives right now is that there is more focus on stock-picking, and the macroeconomic concerns don't have much impact.
The Fed is not likely to be dovish, but market participants seem convinced that conditions really are improving, although the Fed may not admit it.
We have a flat start to the day, but things will heat up fast with Powell on deck.
