The Market’s Hopes are About to be Squashed

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Bring on the wet blanket.

As of Thursday morning, the stock market had bounced sharply off of last week’s extremely oversold conditions.

The technical indicators have moved into neutral territory. Investors are feeling a bit more bullish. And, Nvidia (NVDA) just crushed its earnings report.

Optimism is returning to the stock market.

Jerome Powell could put a stop to that.

The Chairman of the Federal Reserve Board is scheduled to speak in Jackson Hole today. He’s unlikely to say anything new.

He’ll likely just confirm that the Fed is “data dependent.” It wants to get inflation under control. Interest rates will be “higher for longer.”

But, the market is looking for a nod, or a wink, or a smirk, or anything that suggests that the Fed is nearing the end of its tightening cycle.

If we get it, then stocks could rip higher from here. The S&P 500 could rally for several sessions, and we could finish August closer to where we started it.

Wouldn’t that be something?

But, if history is any sort of a guide, investors are more likely to be disappointed by Mr. Powell than encouraged by him. After all, it was the Chairman’s speech at Jackson Hole last year that kicked off a multi-week decline in the stock market.

The S&P 500 was trading near 4200 when Mr. Powell took the stage on August 26, 2022. One week later, the index was at 3900. One month later it was near 3600.

Of course, the world is different today than it was last year. Interest rates are already sharply higher. The government’s version of inflation has come down – a lot. And, we’re one year closer to a Presidential election.

So, there are reasons to expect Mr. Powell to clear his throat or shuffle his papers when he says the exact same thing he has said for several months. And, the computer algorithms will take that as a buy signal.

But what if it goes the other way? What if there’s no wink, no nod, no finger guns?

What if Mr. Powell looks straight into the camera, and in a clear, unwavering voice, utters the phrase, “We are not done?”

A repeat of last year’s decline certainly seems possible.

Trading stocks ahead of Chairman Powell’s speech is really just a matter of risk versus reward.

Last Friday, stocks were brutally oversold. Technical conditions were stretched far to the downside. The market was set up for at least a snap-back rally.

The reward to buying stocks then was greater than the risk.

Now though, the market has bounced. Technical conditions are closer to neutral. We’re nearing the seasonally weak month of September. And, Chairman Powell is about to take the stage.

We can’t rule out the possibility of stocks continuing higher from here. But, it sure seems to me like the risk to buying this morning is much higher than it was last week.

Best regards and good trading,

Jeff Clark

What do you expect Powell’s next move to be?

Let us know your thoughts – and any questions you have – at [email protected].