A Market Stuck on Hold Leaves Traders With Little to Do
It was a dreary day on Monday, but the market held up fairly well despite endless coverage suggesting that the major AI companies could slow the development of new models.
Semiconductors and AI infrastructure took the brunt of the damage and banks were weak as well. However, overall breadth was close to flat as money rotated into Alphabet ($GOOGL), Microsoft ($MSFT) and Meta Platforms ($META) along with pharmaceuticals and retailers.
The AI slowdown story won’t resolve quickly, making it even harder to navigate Wednesday’s Fed decision. It is actually helpful to the Fed if AI does slow, but the magnitude of capital spending is already so extreme that a slowdown may not be meaningful in the near term.
One positive on Monday was that, after oil reversed from its highs, bonds rebounded. The 10-year broke the important 5% level momentarily but the worry diminished as the day went on.
Not Enough to Do Anything
There was a lot of small, random movement on my screens on Monday. None of it was bad enough to make me want to bargain hunt, and none of it was strong enough to make me believe momentum is building.
That sums up the entire market right now. The stocks getting hit are not falling far enough to create the kind of dislocation I want to buy, and the stocks holding up are not acting well enough to suggest a new uptrend is starting. It is the in-between action that offers a day trader some action and offers everyone else nothing to do.
The rotation action is one interesting aspect that favors traders. Money moving out of the chips and AI infrastructure and into Alphabet, Microsoft and Meta, plus the defensive groups, is the market sorting rather than selling. That is better than a broad liquidation, but rotation into the safest large caps and the defensives is not the kind of rotation that signals confidence. It is the kind of movement that signals caution.
Stuck on Hold
We are stuck on hold until we get the Fed decision and more news flow. There is no reason to force anything in front of an event this size.
The Fed is genuinely uncertain right now. There are good arguments for it to hold, since much of the inflation is coming from oil and tariffs that a rate hike cannot fix, and the economy outside of AI is already soft. But the market treats a hike as close to a certainty, so the surprise would be a hold rather than a move.
A failure to hike may not be the good news some folks assume. If the Fed holds, it either means the data gave it room, which would be fine, or it means the Fed blinked in front of the midterm elections, which would raise a credibility question the bond market would not like. A hold for the wrong reason could push yields higher rather than lower, which is the opposite of what a relieved stock market would expect.
Game Plan
I did nothing on Monday and that was the right call for me. My cash gives me the flexibility to move when there is a reason to, and there was no reason to on Monday. The Fed decision Wednesday afternoon removes one of the three big unknowns hanging over this market. Oil and the AI question will still be there, but at least the rate decision will be behind us, and the reaction to it will tell us more than the decision itself. I would rather see how the market handles Wednesday than guess at it now.
Have a good evening. I’ll see you tomorrow.
At the time of publication, DePorre had no positions in any securities mentioned.
