Profit taking or Market reversal post the Fed's 0.5% cut?

The markets seesawed yesterday, running up immediately after the Fed announcement of a 0.5% cut, only to retreat just as fast. The main indices all ended the day in negative territory. It will become clearer today whether this was profit taking and a chance for the market to catch its breath or the first signal of a wider retreat. The Bear case is that a 0.5% cut can be read that the US economy is falling into recession and that the Fed was forced into an aggressive move, however Powell's comments contradicted this, stating that he did not see and elevated chance of a recession.

Volumes were higher than in recent weeks. The VIX fell back slightly to 16 - it hit 65 intraday on 5 August, its highest level since Covid in 2020. Yesterday's performance: DJIA -0.25%, S&P 500 -0.29% and Nasdaq -0.31% (Mag7 -0.15%). On an equal weighted basis (our measure) the overall market was -0.36%, Small and Medium stocks performed best. Breadth was 42% (range of 12% to 88% over the last six weeks) with stronger daily volumes of 8.6b (the average daily volume over the last year of 7.9b). 

One day returns as follows - equal weight basis: Mag7 -0.15% (AAPL +1.8%, NVDA -1.9%), large -0.19%, medium +0.04%, small -0.18% and micro -0.63%. On a 1 and 2 week equal weight basis; Market +2.9% and +2.2%, Mag7 +1.4% and +4.4%, Large caps +2.1% and +2%, Medium cap +3.8% and +2.9%, small cap +4.5% and +3% and finally Micro cap +2% and +1.7%. 

Our risk monitor remains in favour of the larger cap stocks. Small and Micro stocks performed poorly following the July nonfarm release, although as fear subsided they recovered strongly through the middle of August. Interestingly the Small and Micro stocks held up fairly well relative to Large post the August nonfarm figures and Micro have actually outperformed Large stocks over the last week though the Micro stocks were weak both ahead of and after the Fed decision on Wednesday.

Basic Materials was the only sector in positive territory yesterday - Construction Materials and Metals and Mining were both up but Gold and Silver Stocks were down c2% probably reflecting some profit taking. There was no clear trend in the other sectors move although it favoured the Bear Sectors more. Consumer Cyclicals, Technology and Healthcare all underperformed. Energy was also weak having outperformed over the last week although at the time of writing this commentary Oil and indeed Gold and Silver are all up.