In more than 30 years as a financial professional, I have never seen a market anticipate an interest rate cut the way this one has. Good grief.
The "groupthink" here is that this market "deserves" a cut - not that it needs it. And that, friends, can be a dangerous perspective for the market. This market feels crowded and to some degree "bullied" higher.
In my "10 Commandments of Trading," we're talking Commandment II: Never run with the crowd; avoid bandwagons... unless you're the one driving.
In this situation, there's a bit we can glean from all the Wall Street analysts and investors out there...
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Investors Are Definitely Being Herded Now
I don't talk about them often, but the various investor polls are a good source of where the market stands in terms of becoming crowded.
Take the Investor's Intelligence poll. This weekly poll tracks the outlook from more than 130 independent investment newsletter publishers.
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This poll is well-known for being an accurate contrarian indicator. Why? Well, when the ratio of bulls to bears reaches excessive levels, it often marks a top in the market.
Last week's reading of the poll weighed in at a hefty 3.23 bulls for every bear, among some of the higher readings in the last year. For those unfamiliar, readings over 3.0 usually put the smart money traders on alert because it's a sign that the market is becoming crowded.
In this case, the Federal Reserve is what's packing 'em in like sardines...
This afternoon's announcement feels almost certain to underwhelm the market as the expectations have fluctuated between no interest rate cut and a 0.5% cut over the course of the last three months.
The Fed has essentially been bullied into cutting rates, despite the continued flow of strong forward and lagging economic data.
This is where the potential danger comes in.
An underwhelming Fed combined with overly optimistic expectations and a crowded market may equal disappointment. And disappointment definitely equals selling.
Frankly, we won't know for a few days. (I don't have a crystal ball.)
But you can take this to the bank: Don't take any cues from the market's initial reaction to this afternoon's announcement. Let it simmer for a day or two, and then follow Commandment I: "The trend is your friend... until it isn't."
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About the Author
Chris Johnson (“CJ”), a seasoned equity and options analyst with nearly 30 years of experience, is celebrated for his quantitative expertise in quantifying investors’ sentiment to navigate Wall Street with a deeply rooted technical and contrarian trading style.