Last week, the Federal Reserve held its March FOMC meeting and press conference and also released an updated set of economic projections.

The Fed left the fed funds rate on hold at 5.25% – 5.5%, but its updated “dot plot” still pointed to three rate cuts in 2024. The FOMC also sees the fed funds rate gradually heading to around 3.1% by 2026, indicating that this year is likely the start of a multiyear rate-cutting cycle.

For the first time in 2024, the S&P 500, the NASDAQ, and the Dow each posted a weekly total return of 2% or more. That uniform progress pushed each index to a new record high and marked a shift from the modest declines recorded in the previous two weeks. An index that tracks investors’ expectations of short-term U.S. stock market volatility fell to its lowest level in more than six weeks. The CBOE Volatility Index fell about 9% for the week; relative to a recent intraday high on March 11, the VIX was down 18%.

Overall, markets welcomed the more dovish messaging coming out of the Fed and Chair Jerome Powell. Markets reached new highs, and bond markets moved higher as treasury yields softened last week. The more cyclical parts of the market, including small-cap and mid-cap stocks and sectors like industrials and financials, were among the top-performing for the week. The better economic outlook and potential for lower interest rates may be longer-term catalysts for a broadening of market leadership.

Broadening market participation beyond mega-cap technology is a welcome sign of a healthy market dynamic. As the potential catalysts of Fed rate cuts, some easing in inflation, and better and broader earnings growth this year unfold, I see the theme of broadening market leadership possibly continuing to play out.

Technically, however, the market’s underlying breadth appears to be rather light and narrower recently in the face of new highs. This non-confirmation or weakening of strength by the underlying technicals often occurs as the markets stretch to new highs, but it can be a sign of a tired market and possibly approaching highs. However, price is king, and the markets can and often do surge much higher than most think. This invites shorting and or hedging, but coming too early can result in a possible squeeze of those shorts. That can fuel the advance even further to even more overbought conditions.

My advice in these instances is “Never stand in front of a runway freight train” The period just ahead will likely produce increased volatility as the bulls and bears vie for positioning for the next phase of the markets. There will be plenty of opportunities to go short and /or hedge your positions in the coming days and weeks ahead when the patterns and technicals tell us to do so.

And remember, trade what you SEE not what you think!

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