Momentum Monday – A Lovely September Fools Most…Now Let's See What Rate Cuts Do For Us

Being a forward-looking machine, the market priced the rate cut ahead of the mid-September FOMC decision. This is why yields went down and rate-sensitive stocks went up in anticipation of the event. The market also tends to surprise the majority and often moves in a way that is counter-intuitive to most. It happened again last week. In a typical “buy the rumor, sell the news” fashion, yields rose after the rate cut decision. The jump acted as a headwind for the most rate-sensitive sectors like biotech, solar, housing, regional banks, and small caps in general. The money rotated back into big tech stocks and over the past two weeks, we saw notable upside moves in NVDA, TSLA, META, AMD, and SOXL. 

Then, on Friday we saw another lower-than-expected PCE inflation reading which confirmed that the Fed is on the right path. Rates resumed lower which acted as a tailwind to small caps, biotech, solar, and homebuilders while big tech took a break. The big question here is if we will see a continuation of that trend in the coming weeks. As Linda Raschke likes to say “The market is going to do the most obvious thing in the least obvious way”. We all know that the rates are likely heading lower but not in a straight line. There will be shakeouts along the way that will make you question everything.

In the meantime, Chinese stocks are in the midst of a monster rally. Many were up 30%+ in a week after several big upside gaps in a row. We saw a similar action in May of this year that was fully erased a few months later. The difference this time is the much bigger volume behind the move and a rising 200-day moving average which will bring more market participants to the field. If this move has more legs, we will likely sell pullbacks to rising 10 and 20-day moving averages that will get bought and offer much better risk/reward entries.