It’s all about expectations

Mid-week market update: Four weeks ago, I published NVIDIA at the bat, in which I discussed the market expectations for leading AI stock NVIDIA ahead of its earnings report. NVIDIA came out with a strong report that exceeded Street expectations, and the stock reacted with a price gap the following day.

 

Fast forward a month. The company unveiled its new chip and the market reaction was a thud. In fact, the AI bellwether Semiconductor Index weakened and violated a relative uptrend channel (bottom panel). This was a lesson in expectations, how the market reacted to incoming data, and how expectations evolve.

The reaction to the FOMC meeting announcement is another lesson in expectations and how they evolve. The Fed announced that it was keeping rates steady, which was not a surprise, and it was waiting for greater confidence on falling inflation for it to cut. The Summary of Economic Projections (SEP) showed that the Fed had raised its projections of 2024 GDP growth, slightly lowered the unemployment rate, and raised its core PCE projection.

As for the dot plot of individual FOMC members rate expectations, the median dot for the end of 2024 stayed at three quarter-point rate cuts, but the distribution showed that the distribution moved up, indicating some latent hawkishness.
 

 

There are different ways of looking at this data. Are investors looking at a glass half full or half empty? During the press conference, Chair Powell was given every opportunity for a hawkish interpretation. Instead, he presented the dovish view that inflation will eventually fall to its 2% target and the Fed will cut rates.

In reaction, Fed Funds expectations raised the odds of a June cut.

Here is my take. Powell would like to cut rates, but he would like a consensus and no dissents before the Fed cuts. The hawkish evolution of the dot distribution indicates that he is encountering resistance within the FOMC. I agree with Claudia Sahm’s view that the Fed won’t cut rates until the July meeting, which is contrary to the market consensus. But this interpretation needs to be confirmed by Fed speakers pushing against the market view of a June cut in the coming days.

Here is how the stock market reacted. The S&P 500 rallied through the 5200 level to a new all-time high. Breadth internals are mixed. Relative breadth isn’t broadening out, but they aren’t falling apart either.

The weakness in semiconductors and AI plays is a worrisome sign, but the bears need to push the market down through trend line support to gain the upper hand. After that, the first support level can be found at the NVIDIA report gap and the 50 dma at about 5000.

The sell signal from the usually reliable S&P 500 Intermediate Term Breadth Momentum Oscillator is still intact.

My inner trader remains short the market, but if stock prices don’t reverse their rally in the next few days prudent risk control calls for closing the position at a loss. The usual disclaimers apply to my trading positions.

I would like to add a note about the disclosure of my trading account after discussions with some readers. I disclose the direction of my trading exposure to indicate any potential conflicts. I use leveraged ETFs because the account is a tax-deferred account that does not allow margin trading and my degree of exposure is a relatively small percentage of the account. It emphatically does not represent an endorsement that you should follow my use of these products to trade their own account. Leverage ETFs have a known decay problem that don’t make the suitable for anything other than short-term trading. You have to determine and be responsible for your own risk tolerance and pain thresholds. Your own mileage will and should vary.

Disclosure: Long SPXU