For at least the third time this year, market participants are engaged in the debate over whether the market is enjoying a sizable bear market bounce or a significant turning point.
Those that believe the market has bottomed are primarily focused on the weaker-than-expected CPI report that was issued last week. That has pushed down the odds of a 0.75% hike at the next Fed meeting to just 20%, while the odds of a 0.5% hike are now at 80%.
The bottom-calling bulls are also optimistic about weakness in the dollar, a bounce in bonds, loosening of Covid restrictions in China, and positive seasonality. The size of the move last week emboldened bulls who believe that poor positioning and short covering will keep this market running and will be propelled by a slightly less-hawkish Fed and hopes that a recession will be shallow and short-lived.
The bears say, 'not so fast'. The Fed has made it quite clear that the battle against inflation is not even close to being over. Jerome Powell's message at the last Fed meeting was that the pace of rate hikes may slow, but they are likely to go higher than expected and last longer before the Fed will feel that it is in control of the situation.
There are some signs that Fed policy is working as the housing market has already slowed quite a bit, and there are some minor signs of softening in employment, but the fallout of higher rates is still not fully felt.
Can the market withstand the economic slowing as the Fed continues its battle against inflation? Even if the pace of hikes does slow, the conditions will be quite different than what we had when there was a dovish Fed in a bull market.
The bears are very skeptical of the narrative that inflation has slowed and the Fed will pivot and put a bottom in this market.
The more important question is how far this counter-trend bounce can go even if it isn't a bottom. Back in July, the bounce ran for a month, and we now have positive seasonality to help this one along.
The fallout in the cryptocurrency market due to the FTX debacle is causing some slowing in speculative appetite, even in equities, but if that is digested, there aren't many negatives in the short term. The next Fed meeting is 30 days away, but there will be plenty of economic news that will influence the Fed.
We have about 10 Fed speakers this week, which will impact the market mood, but there is likely to be some support on pullbacks at this point. The market is overbought after the huge run and is unlikely to suddenly collapse unless some very surprising new news hits.
The bulls have the edge at this point, and it doesn't really matter whether this is a bounce or a bottom. The action is likely to stay positive for at least a few weeks.