I Guess I Didn’t Hear the Same Powell Speech That Other Traders Did

I’m unsure what to say about Wednesday’s rally except, “WOW!” We can agree that Todd Campbell was spot on when he suggested that traders potentially were leaning too negatively ahead of Fed Chairman Jerome Powell’s Brookings Institution speech.

Speaking of Chairman Powell and the incredible stock market gains, what did he say that warranted a 4.5% jump on the Nasdaq and a surge of better than 3% on the S&P 500? Do you know? Because I sure don’t!

The Wall Street Journal’s Nick Timiraos (behind the paywall) ran a piece Wednesday afternoon stating, “Jerome Powell Signals Fed Prepared to Slow Rate Rise Pace in December.” OK, that’s nice. But suppose we flip over to the CME FedWatch Tool. In that case, while the market is pricing in a 75.8% probability of a 50-basis-point rate hike in mid-December, the market was already pricing in that exact probability one week ago, on Nov. 23.

The bulls can point out that the odds of a 75-basis-point hike in December declined from 33.7% on Tuesday to 24.2% on Wednesday. Or the justification for the rally might be that the odds of a 25-basis-point hike on Feb. 1 rose a few percentage points while the odds of a 50-basis-point hike declined.

I even heard a handful of folks label yesterday’s speech from Powell a clear signal that the Federal Reserve is ready to pivot. And that got me thinking — what exactly is a Fed pivot?

If you google “What is a Fed pivot,” the first thing that pops up is a Fed pivot definition, courtesy of Investopedia. And according to Investopedia’s website, “A Fed pivot is when the Federal Reserve reverses its existing monetary policy stance. A Fed pivot occurs when the underlying economy has changed to such a degree that the Fed can no longer maintain its existing monetary policy.”

Apparently I was listening to the wrong speech yesterday because I did not hear Powell say that he is flipping gears and preparing to lower rates.

So, why did traders trip over themselves to buy stocks yesterday?

Rev Shark nailed it in his closing comments: “The main reason is that expectations were low. It was anticipated that he would continue to sound negative and hawkish, but the tone of his comments was a little more upbeat and optimistic. He indicated that the Fed felt it had a solid plan in place and was confident it would eventually work.”

As far as stocks are concerned, we know boring ole industrials and value stocks have been in vogue. It’s great to see an ETF such as the Vanguard Value ETF (VTV) at a mere 3% from its all-time high or the SPDR Dow Jones Industrial Average ETF (DIA) at only 5.3% from its early January high. But buying or adding to either ETF at current levels suggests you believe a new bull market is in place. And I, for one, am not there yet. If anything, I’m inclined to sell these ETFs at the first sign of weakness beneath a 10-day exponential moving average (EMA).

As far as the iShares Russell 2000 ETF (IWM) , SPDR S&P 500 ETF (SPY) and Invesco QQQ Trust (QQQ) are concerned, none of these ETFs are as stretched as the DIA. For scalping and swing trading purposes, I’m willing to own these three ETFs with the caveat that I’m a seller at the first hint of a close under the 21-day EMA.