Currently the bears have some pretty convincing arguments against further market upside. China's economic growth is slowing, and inflation is being driven by supply-chain problems and increased energy prices. Interest rates are rising, and central banks are running out of ammunition. Bears will also claim that valuations are unreasonable and much of the market is in a bubble.
Despite these compelling negative arguments, stocks managed a strong rebound last week. After the CPI numbers were released on Wednesday morning, stocks moved sharply higher and finished at the highest levels in several weeks on Friday.
The bounce created some overbought technical conditions and enticed some traders to take fast profits, but the positive price action changed the tone of the market. Some good earnings reports helped, and the negative seasonality of the last couple of months is coming to an end.
The question now is whether the bears can regain their edge due to the macro worries or will these negatives help to build the proverbial 'Wall of Worry'. Markets often climb a wall of worry when there is hesitancy to put cash to work, but as stocks act well, those on the sidelines start to inch in and do more buying. That buying drives up stocks and causes more people on the sidelines to go to work.
Stocks were extended after the bounce last week, and the slow China growth is providing an excuse for some softness this morning but did the action last week create a new crop of dip-buyers, and will earnings reports create some positive responses?
The negative narratives are growing loud but will they kill the positive price action that started developing last week? That is the battle we face, and the best way to deal with it is to watch the price action. Some downside is justified at this point, but we need to watch support levels and see how much interest there is in buying softness.
We have a negative start to the week, and it is the FATMAAN names leading to the downside. Bitcoin remains hot on the launch of a futures ETF, but many market players are debating whether that may mark a short-term top.
