Some negative comments from Apple (AAPL) and a market reversal on Monday was a perfect set-up for a surprise rally on Tuesday. Market players were caught leaning the wrong way, and that provided the fuel for an energetic rally.
There were a number of reasons given for the strength, such as less worry that the Fed will be too hawkish and hope that an ugly recession might be avoided. Bonds dropped, which reflected a shift in the prospects of a slowing economy. Also, the dollar dropped after a furious run that took it to par versus the euro. This was viewed as a positive as it makes US goods more attractive to overseas buyers.
The billion-dollar question now is whether this is just another very energetic bear market rally or the start of a substantial shift in market character. We can guess, but there is no way to know for sure. The best course of action is to let the price action guide us. If there is a true shift in the market, then we should see support levels hold, more interest in dip buying, and better chart development. Those things take time, and there will be opportunities to add long exposure if and when it occurs.
The biggest positive right now is that the market has had muted responses to negative news. The hotter-than-expected CPI report was digested, concerns that the Fed would hike rates 1% next week were shrugged off, and worries about a recession have declined.
Earnings season has not produced any great reports so far, but the market seems to have priced in the disappointment already. IBM (IBM) was ignored yesterday, and banks rebounded nicely after some initial selloffs.
Netflix (NFLX) is trading higher this morning on a report that was mediocre but not nearly as bad as feared. Analysts have mixed reactions to it this morning, and several have cut target prices, but this is a good example of how bad news has been anticipated and discounted already. This is the same dynamic that many market participants hope will work for the overall market.
Tesla (TSLA) reports tonight and will attract substantial attention, but the fireworks really don't start until next week when the big-cap technology names report and the Fed unleashes its next interest rate hike.
We will see rather quickly today if yesterday's surprise rally created some FOMO to drive things higher or whether there will be a desire to cut some exposure after catching a good move.
I'm treating this action as just another bear market bounce at this point but will be happy to change my mind if positive technical and price action develops further.
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