It seemed like a fairly mild, albeit negative day for the market until there was a big intraday reversal off the lows that produced a loud sigh of relief. For a while it looked particularly dire as the opening lows were breached and the selling accelerated. Buyers finally braved the storm, however, and turned things back up in the afternoon but the bounce stalled out at the opening highs and breadth was still three-to-four negative.
It is important to keep in mind that the biggest bounces tend to occur in poor markets. That doesn't mean they will last but negativity tends to become extreme and that sets up conditions for a sharp bounce. Ultimately downtrends are a product of bounces like this that fail.
Part of the reason for this intraday bounce is that many smaller and secondary stocks have become quite oversold and with the weakness in the senior indices they have stayed suppressed. At some point the bargain hunters will step up and that will attract more bargain hunters, although it is much tougher for that dynamic to work when the big picture indices are in the red.
Although the bond market was closed Monday for the Columbus Day holiday, the iShares 20+ Year Treasury Bond ETF (TLT) continued to sink. It is now down 3.9% over the past six trading days and driving yields to levels not seen for some time. There is talk that bonds are due for a bounce but this is a significant change in character that is likely to remain an issue for now.
The good news is that earnings season is approaching fast and that should provide for more opportunities in individual stocks. This selling is driving down expectations and that will provide some interesting setups.
This market continues to require a high level of caution. There is pressure in a number of forms and there is no indication we are on the brink of a quick recovery. Traders have grown used to the market coming back from brief bouts of selling and that is going to make it much more painful when we have a real trend reversal for a change.
Have a good evening. I'll see you tomorrow.