Money Flow – Fed begins to quell rally

Last week was a volatile one for the indices, with all starting to lose ground behind the rally. The Dow Jones had the best relative strength, while the small caps and Nasdaq lagged behind.

Market players were hoping for momentum to build after last week’s big jump in the CPI report, but a parade of Fed spokesmen made bullish comments and held back action. The odds that the Fed will raise interest rates by half a percentage point jumped to between 75% and 85% last week, which is the “pivot” the market was hoping for, but the problem is that it’s not really a pivot.

Fed spokesmen made it very clear that the battle against inflation continues and rates are still rising. There may be a slower rate of rise, but they may last longer.

In addition to the inflation debate, last week’s retail sales report raised some concerns about slowing growth. Walmart posted strong numbers, but Target disappointed expectations, and both indicated there are still significant hurdles ahead.

This Thursday is the US Thanksgiving holiday, which is usually a positive day for US markets. Traders tend to pursue more speculative action, but in the context of the current bear market, this day may not be as impressive as it has been at other times.

Bulls are still hopeful that a slight rate hike in December, softer CPI and positive seasonality will help lift the market for a while, but the Fed is putting up some headwinds and the economic picture is not very attractive.

Many market players are tired of the bear market and eager for it to end. There is no clear indication that this is about to happen, but this emotion has played out in a market pattern many times this year. Investors and traders ignore the Fed’s clear hawkish stance and create strong countertrends that eventually end abruptly when there is significant economic news or comments from Fed Chairman Jerome Powell. 

Market players simply don’t want to accept the Fed’s message until they are forced to. They are fighting the Fed and hoping there will be some development that will lead to a significant reversal from the Fed, which will end this bear market. 

On Thursday morning, even St. Louis Federal Reserve President James Bullard speculated about raising interest rates to levels not previously mentioned.

The problem for bulls is that there are really significant economic downsides, and they can get big quickly. The big challenge now is that the Fed will have to deal with the negative impact on the economy as it aggressively raises rates to bring inflation under control. It will not be a smooth transition and it is naive to believe that inflation is the only thing that matters.

The rally is already showing clear signs of slowing down and it is only a matter of time before the economic negatives weigh in and we see another downward movement. Fed spokespeople will continue to bombard the market with hawkish comments this week, which will begin to dampen optimism. In focus will be Wednesday’s economic data on durable goods orders, jobless claims, preliminary PMI data in manufacturing and services, consumer expectations and sentiment, as well as the Minutes of the FOMC meeting.