THE OPPORTUNITY
Yes, the market appears capable of rallying after Wednesday’s Federal Reserve decision.
That is not the same as saying it is ready to begin another sustained advance.
Stocks have declined in six of the past seven sessions. The S&P 500 has fallen back to 7585.73, its third attempt at setting a bull trap on the August breakout.
Meanwhile, the probability of a quarter-point hike has climbed to roughly 92%, leaving little room for the decision itself to surprise investors.
That creates the conditions for a relief rally.
This could, after all, be the shakeout before the breakout.
The market has been selling ahead of a widely anticipated event, sentiment has weakened, and some short-term selling may already be exhausted.
Unfortunately, the supporting evidence beneath the indexes has also deteriorated.
Breadth remains weak, junk bonds have made another new low, the 10-year Treasury yield closed at 5%, oil is trading at $104, and the S&P 500 Equal Weight (RSP) and the Russell 1000 Equal Weight (EQAL) continue to break down.
The market may be set up to rally. However, it has not yet earned the conclusion that the correction is over.
The price action remains under significant, sustained sell pressure.
THE CASE FOR A RALLY
The strongest bullish argument is that expectations have already shifted considerably.
A quarter-point hike is almost fully priced. Investors are no longer positioned for a friendly Fed, and stocks have declined ahead of the announcement. If the Fed delivers the expected hike without strongly signaling a series of additional increases, the removal of uncertainty could produce a quick rebound.
Treasury yields also stopped advancing late Tuesday even as oil continued climbing. If the 10-year rejects 5% following the announcement, equity valuations would receive some immediate relief.
The S&P 500 is approaching a support area between approximately 7580 and 7620. A quick recovery above 7620 would raise the possibility that Tuesday’s breakdown was a shakeout rather than the beginning of a larger decline.
Mega-cap technology remains another source of potential support. The Magnificent 7 (MAGS) have held up better than semiconductors and small caps. Because of their index weight, a strong response from MAGS could lift the S&P 500 and Nasdaq quickly.
The ingredients for a rally are present: a widely expected decision, several weak sessions, important support nearby, and enough defensive positioning to fuel a reversal.
THE CASE AGAINST A RALLY
The bearish argument is that the market’s problems extend well beyond Wednesday’s rate decision.
The S&P 500 lost 7620 and closed near its lows. Roughly two-thirds of stocks declined. The Russell 2000 fell another 0.81%, momentum was the weakest factor, and mid-cap quality was the only factor group to finish higher.
Credit is also refusing to confirm the stability seen in the major indexes. HYG made another low, suggesting that risk appetite is deteriorating beneath the surface.
Then there is the combination of oil and Treasury yields.
WTI climbed 4.33% to $105.78 and has risen during ten of the past eleven sessions. The 10-year Treasury yield reached 5%, while a weak 20-year Treasury auction demonstrated that investors are demanding higher compensation to finance long-term government debt.
The Fed can deliver exactly what the market expects and still fail to solve either problem.
If the 10-year remains above 5%, oil pushes toward or through $110, and HYG continues falling, any post-Fed rally could be brief. The first move might reflect short covering rather than renewed institutional demand.
BENEATH THE SURFACE
The market’s reaction should be evaluated as a sequence rather than a single index move.
The bullish sequence would be:
Fed delivers the expected hike → 10-year rejects 5% → oil stabilizes → HYG firms → breadth improves → S&P 500 reclaims 7620.
A recovery above 7700 would add credibility. Clearing 7750 would suggest buyers are regaining meaningful control.
The bearish sequence would be:
Fed signals more tightening → 10-year holds above 5% → oil remains above $105 → HYG makes another low → S&P 500 fails beneath 7620.
The first sequence would support adding exposure selectively. The second would argue for preserving cash and tightening risk.
LEARN & GROW
A market can be set up for a rally without presenting an attractive trade before the catalyst.
A setup describes the conditions that could produce a move. A signal provides evidence that the move has begun and can be managed with a defined risk level.
Buying before the Fed would mean betting on the interpretation of the announcement. Waiting for yields, credit, breadth, and price to confirm would mean responding to evidence.
The second approach may sacrifice the first few percentage points. It also reduces the chance of being trapped by a violent but temporary reaction.
MIXER
Fed expectations: A quarter-point hike is roughly 92% priced.
S&P 500: Closed at 7585.73 after losing 7620.
Treasuries: The 10-year reached the critical 5% area.
Oil: WTI closed at $105.78 after rising 4.33%.
Credit: HYG made another low.
Breadth: Approximately two-thirds of stocks declined.
YOUR TURN
What would persuade you more after the Fed: a large one-day index rally—or a smaller rally confirmed by lower yields, stronger credit, and improving breadth?
TO TAKE WITH YOU
The market is set up for a rally. Whether it takes advantage of it or fails to do so is something we’ll be watching very closely in order to navigate the short-term.
