Market players have been on edge recently as they have dealt with trade wars, currency moves, and collapsing bond yields. Volatility has jumped and the indices have suffered some significant technical damage. Conditions are good for another big move but emotions have calmed this morning as market players contemplate what happens next.
Typically the market has celebrated rallies in the bond market and a drop in yields but on Wednesday the magnitude of the sudden move caused some panic. Concern that lower rates are not a sign of a positive economy blossomed for the first time.
The likelihood is that the recent issues have not been forgotten but the sharp intraday reversal and strong close on Wednesday suggest that there will be a temporary respite.
The biggest problem now is that lower rates are not the simple and easy cure for market weakness, and it's not quite as easy. The recent drama has pushed up expectations for a series of rate cuts but the indices are substantially lower and in worse shape since the first Fed cut last week.
If the dovish Fed can't support this market then what will? That is the question that market players are pondering at this point.
For now, the focus should be on closely managing positions and marking sure that you protect capital. Thee indices are now struggling with a downtrend which means that bounces can not be trusted to last for long. Typically countertrend moves are strong enough to convince market players that the worst is over but that is when a failed bounce does the most damage. We need to be particularly aware of that possibility at this point.
This is a market that is undergoing a transition in a number of ways and it is more important than usual to stay reactive to changing conditions. No one knows what is going to happen next but we can be mentally prepared to deal decisively as things develop.
We have a minor positive open on the way but it is going to be difficult to produce sustained momentum from here. Stay flexible, think strategically and focus on protecting capital. We will find opportunities but need to be more selective than usual.