On the back of CPI being in-line with estimates and the Harris/Trump debate not producing any large shockers last week, both the S&P 500 and Nasdaq 100 completed the recovery sequence I was looking for at month-end. The difference, though, is that the recovery sequence happened in one week, all before FOMC. That makes things tricky, observes Larry Cheung, founder of Letters from Larry.
This week won’t be as straightforward. Let’s talk about the upcoming FOMC meeting and the jumbo-sized rate cut that is now being favored. One of the catalysts I used to favor a Semiconductor/Tech rebound last week was based on the concept of a 25-basis point cut rather than a 50-bp cut.
Invesco QQQ Trust (QQQ)
With a 50-bp cut now being assigned a higher probability, we’re seeing a slight shift in the landscape with capital flowing again towards names in the Dow and the Russell 2000 yesterday. The recent increased probability in the size of the rate cut is quite unusual, and I definitely take it as a sign of caution for how the FOMC may play out.
Here are a few questions that I’m now thinking about:
- With a 50-bp cut now being the higher probability route, will a 25-bp cut underwhelm markets and cause a selloff?
- If a 50-bp cut happens, will that cause the Nasdaq to sell off again? And cause a rotation back into Dow/Russell 2000 names to reverse last week’s recovery?
- If a 50-bp cut happens, does that mean the Fed is behind the curve and they are admitting that the economy has slowed down to a point where a soft landing is not probable?
Most of these questions point to a more challenging market reaction after the FOMC. Given that NQ and ES have achieved my month-end targets far ahead of schedule, I think the wise thing to do ahead of FOMC is take profits on a partial position and wait for further clarity. There will always be opportunities to re-enter the index/individual stocks on dips, especially if the rollover gap fill happens in the coming weeks.
I still like the market’s direction and believe it heads higher by year end. But the short-term picture is less visible to me. The prospect of a 50-bp cut rather than 25 bps makes me more cautious than I was last week.
