"Normal isn't normal, it's just what you're used to."
-- Marty Rubin
After the blow-up of the short-volatility trade to start the month, many pundits, including me, declared that volatility was back and that we were likely to see a two-way market in the weeks ahead. That declaration looked rather foolish when we had another classic V-shaped move. The indices moved straight back up for six days and the Dow Jones Industrial Average was up around 2,000 points with barely a downtick along the way.
This is the same unnatural, computer-driven action that has plagued the market for years and it doesn't look like anything has changed. If this continues, then we should be seeing the highs that were hit at the end of January challenged again very soon.
But maybe it is different this time. The one-way bounce was interrupted Tuesday and early indications are soft this this morning. There are concerns about yields and the dollar and that is causing most of the movement. The Fed is scheduled to release the minutes of Janet Yellen's last meeting Wednesday afternoon and the main focus of the market is whether there are any hints that the Fed may now plan on more than three hikes this year.
The bulls have consistently done well when they have ignored the worries about higher interest rates, but this time the issue, and the rates, have been gaining traction. The strength of the economy and the economic news has helped to send the iShares 7-10 Year Treasury Bond ETF (IEF) to its lowest levels since April 2014. That is more than just some meaningless volatility.
Another interesting issue that developed yesterday was that stocks did not move in tandem. The Nasdaq 100 (Powershares QQQ ETF (QQQ) ) greatly outperformed the DJIA as money flowed into technology stocks and chips and software in particular. These groups are more likely to benefit from some inflationary pressures, which may be way they were outperforming.
There were some pockets of strength yesterday, but overall breadth was weak. Many stocks that have seen significant bounces off the recent lows are now overbought and in need of some rest.
A pullback after a huge bounce into resistance levels is logical and normal but this market isn't used to normal and doesn't trust it much. We will see if dip buyers are lurking and will provide support or whether the selling will accelerate.
My focus is on my individual stocks and there were mixed Tuesday. I reduced positions and saw little that I want to buy right now. The market is at an important juncture and it is a good time to be patient and see how it develops.