Wow, what a week of stock market gains! The S&P 500 was up 3.12%, the NASDAQ Comp was up an impressive 4.91%, and the Small Cap Russell was up almost 4%. Below is a chart that shows why the market rallied last week and especially Friday. It’s the CME Fed Watch Tool.
Compare that chart to the one I posted on August 25th. It shows an increase of 25% that the Federal Reserve will lower rates by 50 basis points rather than just the 25 basis points shown on August 25th. I would love to see 50 basis points! I have said many times the Federal Reserve is behind the curve.
Friday was a short cover day; volume was very low on both the S&P 500 and the NASDAQ COMP. While on surface the gains look good, and if you are a trader, take your profits! The entire gain this week was accompanied by low buying volume. To explain it simply, there really wasn’t any institutional selling or trader/hedge fund shorting. Friday’s gain looked impressive but inside the reality it was not. There simply wasn’t any shorting or selling. It looks like short covering! Low volume and big gains. This market rally more than likely will continue into the Federal Reserve meeting on the 18th. With inflation data being supportive and labor markets needing a boost, it could support this short cover rally a tad longer than I expected because the retail market is trading with confidence, the short players are running scared (covering), and institutional players are in hibernation. To me, its obvious institutions are doing little. Trading volume is down!
Bottom line: the market is near the top of its trading range. It may move higher based upon the reasons I gave above. I am not getting sucked into that action. There will be a better buying opportunity sometime before the election. I am looking to buy the next dip. If the polls begin to show a clear winner in the election, this market will bottom sooner than later because it removes the uncertainty that institutions currently harbor.
It’s going to be a very challenging period until institutional investors know who is in the White House. So expect volatility!
What’s most important next week? The Federal Reserve Statement!
The markets I believe are more concerned about the Federal Reserve’s future path on interest rates and not so much concerned about how much the cut will be on the 18th. It’s important to watch what the Federal Reserve statement is after the meeting. Because the next Fed meeting isn’t until November 7th after the election.
Powell (fed chair) needs to come across to the stock market that this is the beginning of a rate cut cycle to get to a natural rate (non-restrictive). If the Federal Reserve (in his statement) seems reluctant to cut rates further than the 18th, that would leave doubt in the markets (institutions) and would be a disappointment and lead to a selloff (because it creates additional uncertainty).I hope this does not happen, but if it does, remember I said that.
Good News!
When the Federal Reserve starts cutting rates into a “soft landing” or “no landing” type environment, the ratio of an up market 6–12 months later is almost 100%, and you normally see a nice rally post election.
Upstart
Upstart had a good week, gaining almost 8%. But don’t read too much into that gain. Like the rest of the market, Upstarts good performance can be attributed to short covering. Real buying is still in hibernation. I still love the stock. I would not be surprised to see continued short covering into the Fed meeting on the 18th. I do think in the not too distant future there will be a great opportunity to buy this stock lower in the not too distant future. I believe the big moves occur toward the end of the year and the first 6 months of 2025.