"A change is as good as a rest."
-- Stephen King
With some renewed hawkish comments from Fed members such as James Bullard, the stronger dollar is weighing on markets around the world.
On Wednesday, the indices suffered their first real pullback since March 8. That was just a one-day affair that was quickly forgotten. The bears are now hoping that a more meaningful correction is about to occur. With the dollar strengthening and oil reversing, the market narrative is changing.
The theme of the past couple weeks has been the relentless upside momentum that was a product of dovish central banks and computer programs. All the fundamental and technical negatives were forgotten, and the focus was on trying to keep pace with a market that barely suffered a downtick.
Yesterday and this morning, the streak was suddenly broken and the reasons for the reversal are easy to find. The questionable fundaments and technicals that had been ignored for so long now are obvious catalysts for some selling. We just needed to break the momentum that had driven us so strongly for so long.
The indices are still well extended since the bottom in February, and badly in need of some sort of reset. We haven't had more than two minor days of weakness in a row since the February bottom and many stocks are now grossly overbought.
The big question is whether we are now undergoing pullback within a bigger uptrend, or is this the end of a good-sized bear market bounce. A number of market strategists, such as Doug Kass, believe that this has been nothing more than a counter-trend rally within a developing bear market.
The primary basis for the bear market argument here is the central bankers are losing their ability to keep propping up faulty economies around the world. The Fed surprised the bears with its last interest rate decision when it acknowledged how it was forced to recognize how weakness around the world was an issue for the U.S. It created new hope for sustained dovishness and weakened the dollar.
We are now starting to see a shift again, as the focus turns to how quickly an interest hike will occur. Many are now thinking it could happen at the next meeting and there is talk about inflation in the U.S. creeping up. It is this sensitivity to the Fed that is the main justification for the turn that is now occurring. Whether it continues to develop is the million dollar question at this point.
From a technical standpoint, there isn't any reason yet to believe that this big move off the February lows has come to an end. It was badly overheated for a while and even the bulls are happy to see it falter a bit. The S&P 500 is still holding above the 200-day simple moving average and has a long way to go before the 2000 level is in play again.
With the long Easter weekend beckoning, there is likely some hesitancy among buyers. The terrorist attack in Belgium was originally planned to occur on Easter Monday, so there are some worries that something else could be brewing.
At this juncture, it is important to control risk and prevent losses from growing, but there isn't any reason yet to embrace the idea that we are suddenly in a bear market. We'll see how things develop, but don't expect to see the dip buyers so a whole lot today.
The good news is all those stocks that were too extended to chase lately are finally seeing some badly needed pullbacks and consolidations.