Gaming out the Fed's next move

Market Sentiment and Profit Taking - The market experienced profit-taking, particularly in momentum stocks, suggesting a potential shift in sentiment [1][4] - The momentum factor, driven by names like Palantir, peaked in mid-August, indicating a possible temporary or permanent top [4][5] - An Evercore ISI note suggested a potential 7% to 15% market pullback if the Fed Chair is neutral or hawkish [8] - The market is potentially front-running expectations of a neutral or hawkish stance from the Fed Chair at Jackson Hole [9] Economic Indicators and Fed Policy - The market is pricing in nearly an 80% rate cut in September, but there's a high probability the Fed Chair's words won't align with this expectation [3] - The Fed Chair has been data-driven, considering both inflation and job growth, making a dovish stance unlikely [10] - CPI was cooler than expected, but core CPI was hotter, not showing a clear downward trend in inflation [19][20] - PPI shows the impact of tariffs, while CPI does not, creating a dilemma for the Fed Chair [16][17][22] - A rate cut of 25 basis points is probable, but further cuts later in the year are uncertain [26] Market Performance and Exhaustion - The NASDAQ Composite is up 40% since April 8th, the NASDAQ 100 up 37%, the S&P 500 up 29%, and the equal weight up 22%, indicating significant gains and potential exhaustion [11][12] - The market's strength year-to-date has been driven by momentum names, leading to a modest correction due to exhaustion [7] - Institutional outlook suggests limited optimism for further market gains, with the median S&P target at 6,500, only a 2% increase [14] ETF Rebalancing and Stock Performance - Recent ETF rebalancing saw underperformance in entered momentum names, including software (Data Dog down 10%, Microsoft down 5%) and crypto (Coinbase, Block) [6] - September has historically been the worst month for the S&P, with an average decline of 2% [19]