"Intelligence is the ability to adapt to change."
-- Stephen Hawking
The market bounced back on Monday as fears over a military clash with North Korea diminished. The market is set to bounce further this morning as Asian stocks recovered further after North Korean state-radio announced that President Kim Jong Un planned to hold off on launching any missiles at Guam.
While equities are bouncing, precious metals, the yen and bonds are weak as the dollar recovers and oil holds steady. Early indications are for the market to build on yesterday's bounce.
The folks in the news media are focused on the events in Charlottesville, Va., over the weekend and several CEOs, including those from Intel Corp. (INTC) , Merck & Co. (MRK) and Under Armour Inc. (UA) , resigning from President Trump's American Manufacturing Council. While it makes for a good news story, it is not having any impact on the markets.
One of the difficulties for the bears since the election has been separating out the political noise that the media broadcasts so loudly. This market has not cared about these events. The only thing that has had much impact on the market has been the worries over North Korea, and many never took that too seriously to begin with.
With the political issue on the backburner again, is this market ready to resume its upward bias?
As I discussed yesterday, the action favors a V-shaped recovery, primarily because that has been the pattern that has worked best for a while. Due to the influence of algorithmic trading this market has been a slave to price patterns. The technical patterns matter far more than the fundamental arguments.
The bears have plenty of fundamental arguments right now as the response to second-quarter earnings was poor, the central banks are more bullish, interest rates slowly are moving higher and negative seasonality is strong.
The problem for the pessimists is the same one that has plagued them since the election -- the price action is not cooperating. The North Korean issue triggered some hope for the bears, but that turned out to be just another short-lived attempt to downside momentum.
After the selling last week, we have a new supply of under-invested bulls, poorly positioned shorts and good conditions for a continuation of yesterday's bounce. There was good reason to be negative last week when the price action turned negative, but flexibility is required to navigate this market. When conditions change, then so should we.