After a furious bounce back rally the previous thirteen sessions, the market opened higher on Thursday but reversed hard to the downside creating “bearish engulfing candles” all over. This is bearish in the short term and it’s no surprise that it comes ahead of Powell’s much anticipated Jackson Hole Speech Friday morning at 10am EST.
Even though I think the Fed’s base case is they’ll move a quarter, and my base case is they’ll move a quarter, I don’t think they’ll feel the need to provide any guidance around that this far out – Lou Crandall Chief Economist, Wrightson-ICAP (quoted in Jeff Cox “Here’s everyting to expect from Fed Chair Powell’s speech Friday in Jackson Hole” [SUBSCRIPTION REQUIRED], CNBC, Thursday August 22
Markets will be looking for any clue about whether the imminent rate cut coming on September 18 will be 25 or 50 basis points. However, I think Lou Crandall is right that Powell is unlikely to give any clues about that at this stage.
Therefore, my personal bias is that – while Powell will take a dovish tone – the lack of any information about the magnitude of the coming rate cut means the speech will not be a catalyst for further upside and could well be a sell the news event. If correct, that raises the possibility that the rally of the last thirteen days may be a bull trap and the market will resume heading south.