Eliminating interest rate cut expectations in 11 days, fully revived in 1 day: The Fed's shift may trigger huge changes in the market.

Author: Duality Research

Compiled by: Deep Tide TechFlow

In just 11 days, the market erased the possibility of a rate cut in December, but in just one day, that possibility has revived.

As we expected, Federal Reserve officials completely reversed their previous hawkish tone last week, raising the probability of a rate cut in December by another 40 percentage points.

From our first chart, we can see that this probability has currently risen to 102%—more than four times that of a few days ago, and all of this has happened without any substantial new data. This undoubtedly raises questions about the Federal Reserve's communication strategy.

As we mentioned last time, this wave of market pullback is completely driven by the Federal Reserve, so a dovish shift could significantly boost risk assets again.

Moreover, this rebound is not only very broad but also has huge trading volume. It is no longer just an oversold rebound, but a genuine buying push. The best way to prove this is to look at the 5-day change rates of the equal-weighted S&P 500 index and the Russell 2000 index.

Generally speaking, the start of a major market trend is often accompanied by significant movements, and we have just witnessed the strongest five-day rally since April. This is not only a good sign but also a quite loud signal that “the market is turning.”

What’s even more exciting is that demand has surged sharply at critical levels, and the timing is just right. More importantly, even with Nvidia's stock price dropping, the S&P 500 index has still proven its ability to continue climbing.

From our next chart, we can see that after excluding the technology sector, the overall market seemed to be weakening. However, thanks to recent positive changes, the S&P 500 non-tech index reached a new all-time high just three days after experiencing its deepest pullback since breaking out in July.

At the same time, the technology sector is still more than 6% away from its new high.

This is a textbook example of a “Shake 'n Bake” reversal - the bears thought the game was set, only to be met with a strong momentum counterattack. Weak investors were washed out, and then the market welcomed a strong and sustained rebound.

Recently, we have observed a similar phenomenon in several stocks related to the real economy, which previously seemed on the verge of collapse — this is not a good sign in a bull market.

Taking regional banks and the retail sector as examples, they once fell below the anchored VWAP (Volume Weighted Average Price) starting from the April low, but subsequently captured strong momentum, rebounding above the anchored VWAP of the September high.

This situation has also appeared in several other sectors, such as homebuilders, equally weighted consumer discretionary and industrial sectors, as well as the overall small-cap stocks. This is a good sign for a rebound, especially since these sectors have underperformed for most of this year.

The good news is that market participation is expanding, and since the reversal of Nvidia's stock price, the leading sectors of the market have performed as we hoped to see. If this bull market is to extend further, now is the time.

This week, the strong possibility of confirming and consolidating this trend may be the emergence of the “Zweig breadth thrust” or even the “deGraaf breadth thrust.” Although these two methods differ in measuring market breadth, the information they convey is fundamentally consistent — the market rapidly shifts from “no one buying” to “everyone buying.”

More importantly, historical data has proven the significance of such breadth shocks—especially when both occur within a month. Statistics show that the S&P 500 index averages a 26% increase in the following year, and this has happened every time. The most recent occurrence was on May 12, and since then, the S&P 500 index has risen by 17%.

In summary, when these breadth shocks occur, they are particularly important because they are not only reliable and powerful, but they should also become key indicators in the investor's toolkit.

Overall, all of this points to a stronger and more sustainable rebound, one that far exceeds the initial attempt at an increase after the October lows. At that time, due to insufficient market participation, the rise of the S&P 500 quickly fizzled out. This time, we see the number of stocks rising within a 5-day range has reached a new high in over a year, just a few days ago, this rolling average was at its lowest level in nearly four months.

The last time such a strong rebound occurred was in November 2023, when the S&P 500 rebounded sharply from a low after experiencing a 10% pullback. More importantly, it was followed closely by a “Zweig breadth thrust.”

Although market breadth is returning, we must also acknowledge that market participation has indeed deteriorated in the months leading up to this rally. This phenomenon has drawn widespread attention — and there are valid reasons for it. However, from a longer time perspective, breadth is equally important.

Traditional breadth indicators, such as the proportion of stocks trading above their 200-day moving average or the number of stocks hitting a new 52-week high, often represent only “point-in-time analysis.” A rapid and severe sell-off can almost instantaneously weaken these indicators, making them often unable to reflect a more representative long-term participation.

A better way to track long-term market participation is to observe the average daily number of rising stocks throughout the year, or to use a rolling 252-day average.

From this perspective, the performance in 2025 is quite strong—the average daily number of rising stocks has reached its highest level since 2021. In other words, market participation during this year's bull market is stronger than in previous years.

It is worth noting that the 1-year rolling average (252 days) is still significantly lower than this year's average level. The reason is simple: the 252-day average still includes data from last December, when the average daily rising stocks were only 204, which was extremely weak.

As we broaden our perspective, the situation becomes even more interesting.

The next chart presents the complete data of the S&P 500 rising index, broken down by a 5-year average cycle. Contrary to what many might imagine, the rolling 252-day average actually shows that, despite the rise of large-cap stocks, overall market participation has increased rather than decreased.

In addition, besides the outstanding performance of the average daily increase in the number of stocks reaching its highest level in nearly 30 years in 2025, we can also see how narrow market participation was on the eve of the internet bubble peak. In fact, one of the worst one-year periods was precisely around the bursting of the bubble in March 2000, when market participation was extremely low.

Although this set of data covers nearly 30 years, we cannot help but notice that for most of the first 15 years, the market breadth indicator remained below the critical line of 250— the dividing point where the number of rising stocks exceeds the number of falling stocks.

In fact, when we plot the average daily number of rising stocks over the past 15 years, the average daily rising stocks in the S&P 500 is only around 246 - which means that the average number of declining stocks is greater than that of rising ones.

This phenomenon is consistent with the performance of the “Value Line Geometric Index,” which tracks the average performance of common stocks. During the same period, common stocks in this index fell by about 8.5%, while the S&P 500 overall rose by 75%.

So, what does this mean for us?

It can be said that today's market is completely different from the past.

Indeed, occasionally a few large-cap stocks become the focus of the market - given their size, this is almost inevitable. However, what is unique about the current market is that more stocks are participating in the market's rise.

However, it is important to note that broader participation does not equate to an even distribution of contributions. Large companies will still dominate the returns of the index, but the participation of more stocks indicates a healthier market.

Conclusion: Widespread market participation = healthy market; centralized returns = the effect of the exponential mechanism.