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Post-Fed Market Update: What's Bad is Good

Post-Fed Market Update: What's Bad is Good

On the morning after the Federal Reserve announced its biggest rate hike since 1994, the pre-open market indexes are all down more than -2%.

I find that encouraging for a second-half market rebound this year, which is something I've been talking about for weeks now.

Here's my reasoning...

As you know, one of the keys to the market putting in a strong "bottom" is extremely negative sentiment on the part of most investors.

As you can tell from the Nasdaq futures index chart below:

  • The first 2 times the Fed met this year, each was followed by multi-day market rallies of 10% and 17%.
  • The 3rd meeting, in May, saw a 5% "day of announcement" rally before selling off again.
  • And then there's today's very poor "post-Fed" market reaction thus far.
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Do you see the pattern? The associated "buy the dip" mentality on the part of investors - is slowly being ground away.

It sounds odd to say out loud, but we should be celebrating that sort of behavior. Why? Because when the next rally materializes, very few people will want to believe that it's real.

That sense of "disbelief" is how stocks get cheap, and are finally in a position to move higher in a sustainable way.

Another reason to adopt a less bearish/more bullish attitude?

Oil prices - and the stocks of oil companies - may finally be rolling over, thanks to the Fed's aggressive rate hikes of late.

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I've said this many times before. When oil prices finally moderate, that's the signal to the Fed (and smart market observers) that its job is done on keeping inflation in check.

So it's important to remember that when the pundits on CNBC start talking about the possibility of a looming recession...that's actually good for the market at this point.

As inflation pressures moderate, and recession indicators (like the US unemployment rate) begin to rise, the Federal Reserve will likely shift its stance on interest rates from "hawkish" to "dovish."

The stock market will sniff all this out weeks and months ahead of time. Hence my belief that the next big market rally will make no sense to many and look like yet another sucker's bet.

Jeff