Fed Speakers Will Feed the Algos This Week

Follow @MrTopStep on Twitter and please share if you find our work valuable!

Every week, MrTopStep invites traders to an “Own the Close” contest where the closest guesstimate where the SPX will settle on Friday’s 4:00 cash close.

The winners get a free week's access to the MrTopStep Chat and trading tools. Enter your guess now!

Our View

The ES and NQ sell off for three weeks and then rally 130 and 664 points in less than two days, respectively. 

My old rule applies again — it takes days and weeks to knock the S&P down and only one to bring it back. It's how the markets work. Once everyone thinks lower prices are coming after the markets have already sold off, it's over. 

Or is it? In my opinion, I also don't think the push higher will go without some bumps in the road, but the feel or tone of the markets has changed. 

Maybe I’m wrong, but I don't think the index markets rallied so much in the last two days because they were oversold or at a support level. Maybe that was part of it, but I think everything has a shelf life. 

You have to go back to the rally after Powell said the Fed expects to lower rates three times in 2024 and stocks — particularly tech — rejoiced. But when the Fed finally came clean that the outlandish rate cuts may be less likely and then acknowledged that they could be off the table entirely, the markets reacted in kind by selling off. 

I was the one that said, “now that the Fed meeting is out of the way, we can now look forward to jobs FRY-day and the options expiration.” Yes, the ES made a new low early Wednesday — what would the Fed say that the markets didn't already know? Thus the markets rallied, but I don’t think it's going to cure the stickier-than-expected inflation that pushed 10-year Treasury yields to the steepest one-month gain since September 2022. Yet the stock market rallied as the 10-year yield fell to 4.569% — although it's still near a two-decade high, with the high still holding firm from October.

As I have said many times, I’m not an economist. But the pain game is not over until the data shows continued improvement in inflation and the Fed starts cutting rates. Here is a link to the JP Morgan report on the May Fed meeting.