And the Bulls Have Done It, Yet Another V-Shaped Move

 | May 19, 2017 | 12:52 PM EDT
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The indices haven't completely recovered from Wednesday's losses, but the oversold bounce is turning into a V-shaped move. The S&P 500 is now down just 0.57% since the close on Tuesday, but the iShares Russell2000 ETF (IWM)  is still down 1.8% in the same period. Breadth is very frisky, with about 4,900 advancers to 1,700 decliners, and there are about 200 stocks hitting new 12-month highs. If there were worries on Wednesday, they are being forgotten today.

What is most interesting about these aggressive bounces is that they tend to occur not because something fundamental has shifted, but because it is the nature of the price action in the market now. The computer algorithms keep pushing -- and momentum buyers fear being left behind. There isn't any news to explain the action. It is just what works for traders who have seen these sorts of dips quite often in recent years.

In the past I've been wrong when I've guessed that the market won't pull off another V-shaped bounce and make it all the way back to recent highs. My gut feeling is that we will see another bout of selling in the near term, but I don't have any hard evidence to back that up. I can make all the same arguments that the bears are making about Donald Trump, the delay in fiscal policy, a hawkish Fed and many other things, but I am slave to price action.

What is ironic about the price action is that markets shouldn't bounce back so easily after a day like Wednesday. It should create some uncertainty and produce some selling into the bounce, but that dynamic doesn't seem to operate any more. It is yet another illustration of how emotions no longer drive the market the way they once did.

I am happy to see some of my positions bounce back, but my market exposure has gone down quite a bit. As I discussed yesterday I closed most of my index shorts early in the day and am in no hurry to reestablish them. The bounce play in many individual stocks is now over, as far as I'm concerned, and I don't look to chase momentum. I need to do some hunting for new entries but I don't expect to find much right now.



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