In after hours trading the SPY reached a new all-time high. Expectations for a Fed rate cut are high.

PRE-OPEN MARKET COMMENTS TUESDAY – The market is waiting for a quarter point rate cut tomorrow and the odds of a 50 basis point rate cut have climbed to 60% based on Fed Funds Futures. Those odds have increased steadily in the last week. This is a very crowded trade and call options on bond futures are at record highs.

From a fundamental standpoint, I don’t see why the Fed would hit the panic button and cut interest rates that dramatically after being steadfast for over two years. Inflation is gradually easing, but some of the core components (i.e. rent) are not falling as fast as the Fed would like. Hourly wages have been growing at an average rate of .3% per month and this is the largest input cost for companies. The jobs numbers have softened slightly, but initial jobless claims are still averaging 230K. That is a relatively low level. Economic conditions have been steady based on GDP, ISM Services and the Beige Book. Both presidential candidates have aggressive spending plans and that is inflationary. The market is at an all-time high so they will not feel any pressure to ease. I feel that a quarter point rate cut is what we will get along with a “wait and see” statement.

Last week the ECB cut interest rates by a quarter point. However, their economic conditions are much weaker than ours. Consequently, I believe the market could be in for a let down tomorrow. If the Fed cuts by a half-point, some will worry that they see something that no one else does.

Does this mean I am bearish? No. Based on technical analysis, I have been mildly favoring the short side since August. The first 10% drop was a potential warning sign. The height and the duration of the bounce would have told me how aggressive sellers are. The market snapped back and it fell just short of the all-time high. That was a sign that sellers were not aggressive and that the market bid was fairly strong. From a bearish standpoint, we needed to hit resistance at the 50-day MA and that did not happen. I had to temper my bearishness. Two weeks ago, the market sold off hard after the jobs report. This also had the potential to gain traction, but it didn’t. The drop only lasted a day and last week those losses were erased. Now the market is forming a Cup & Handle and that is a bullish pattern.

How can I square up my fundamental analysis with my technical analysis? First of all, I don’t have to. My fundamental analysis is meaningless. We trade what we see, not what we think. While I feel that the market is a bit to optimistic on rate cuts, the fundamentals are consistent with what I would like to see. We want solid economic growth and a Fed that has the latitude to cut, but that does not have to due to deteriorating growth or credit concerns.

I would welcome a technical breakout to a new all-time high. However, I would not be loading up. This is a triple witch and we are likely to see a lot of volatility… especially in the bond market. I will be day trading from the long side, but I feel we could see a “sell the news” reaction. We don’t make money on the breakout, we make money on the follow through. I want to see a nice big breakout and follow through buying after that move. The market had a nice drop in August and it made a higher low in September. This is a good set-up technically.

Retail sales came in slightly better than expected and the futures moved 15 points higher on the news. The market is at an all-time high. European markets were strong overnight and Asia was mixed. That is a slightly bullish bias.

Gaps up are dangerous to chase… especially at an all-time high. Be patient and wait for confirmation. Favor the long side and line up your prospects. If the opening gap holds for the first 45 minutes, the chance of a gap reversal will decrease. If this is a “Gap and Go” it could happen quickly and you have to be willing to let it go. If this happens, you will have a chance to buy mid-day. Stick with day trading and don’t assume that the reaction to the FOMC is going to be bullish.

Support is at $560 and resistance is at the all-time high.