The market suffered its longest losing streak of the year last week, and the big question now is whether the corrective action will gain traction. The most notable characteristic of the action was that there was a series of intraday reversals. Stocks started off performing well but then reversed and finished poorly. This is classic bearish action, and the fact that there was a string of such days is a warning sign.
In the early going on Monday morning, stocks are indicated higher, but the obvious issue is whether this strength will hold or will worried market participants use it as an opportunity to reduce some long exposure. Another intraday reversal that undercuts Friday's lows will help to solidify the fact that a downtrend is developing.
The biggest positive right now is the obviousness of the bearish scenario. Seasonality is at one of its worse points of the year, the Delta variant of COVID continues to flourish, supply chain shortages seem to be expanding, there is still debate over whether inflation really is transitory, and there are fears that economic growth is sputtering. It is not at all difficult to craft a bearish argument especially considering the extended conditions of the indices and many big-cap stocks.
It makes sense for stocks to go through a corrective process for a few weeks right now and then set up for more upside as third-quarter earnings hit and we move into the best time of the year seasonally from mid-October to early January.
Despite the market struggles lately, one positive has been that there continues to be fairly good speculative support. Market players have continued to look for good stock picking and have created some nice pockets of momentum while the indices have traded down. There does not seem to be the same sort of negativity in the secondary stocks that took hold in February and persisted for months.
The gap-up open this morning sets up a very interesting test. There will be some strong pressure to sell into the strength, but if dip buyers show up on a pullback and prevent another close near the lows, that will be a positive development. Overall, market conditions are poor, and it is so obvious that we have to consider whether it may be a trap for overconfident bears.
Few folks are going to trust the early strength this morning but are there some dip buyers lurking?