Looking at a chart of the S&P 500, the index has been steadily grinding higher since May this year, after it recovered most of its losses following President Trump’s reciprocal tariffs announcement on 2nd April.
Source: TN Trader
But since May, the daily MACD has drifted lower, setting up a long period of negative divergence. This can often signal that a change in market direction is coming, as the MACD indicates declining upside momentum even as prices hit a succession of fresh record highs.
Yet the last week has seen the MACD curl up a touch as both investors and traders appear in no hurry to book profits as this relentless bull market grinds on. There will be a day of reckoning – there always is. But there’s very little fear out there, and a lot of greed.
Markets have had pullbacks, but each and every one has been seen as an opportunity to ‘buy the dip’ and add exposure. It feels as if it would take something quite drastic to shift this market away from its current bullish narrative. Could tomorrow’s Federal Reserve rate decision prove to be a catalyst?
According to the CME’s FedWatch Tool, the probability of a 25 basis point rate cut now stands at 96%. This follows on from last week’s European Central Bank meeting when rates were kept on hold. But while a rate cut tomorrow is near enough a certainty, what really matters for financial markets is the longer-term forecast for where US rates are going.
Investors should get a decent insight when the Fed releases its FOMC’s quarterly Summary of Economic Projections. Each FOMC member gives their forecast for GDP, unemployment, inflation and the Fed Funds rate for the rest of this year, and beyond.
As things stand, the market assigns a 72% probability of a total of three 25 basis point rate cuts before year-end. Any deviation away from this could cause a rapid repricing in risk.
