After suffering a drubbing on Monday, the market managed only a very mild recovery on Tuesday. Concerns about Evergrande continued to swirl, and many market players were concerned about the technical damage that has been piling up for a couple of weeks now.
Despite the struggling indices, there was some surprisingly strong speculative trading in secondary stocks. This action is not at all reflected in the indices, but there was quite a bit of 'hot' money looking for a place to go. The negative sentiment that was hurting the indices didn't slow down the small traders that were looking for action.
Typically in the most severe market corrections, there is very correlated selling. Market participants dump everything, and bids disappear. There usually is very little appetite for high-risk trades when the market is undergoing a meaningful correction. The fact that this is not occurring suggests that technical support could develop quite quickly.
We have some signs of support this morning as Evergrande managed to make a necessary bond payment, and Chinese markets acted well after being closed for a holiday. There is an increased likelihood that China will take action to prevent a contagion from developing.
The market is also looking ahead to today's Fed policy decision and press conference with Jerome Powell. There will be more talk about tapering, but with concerns like Evergrande and the poor earnings from FedEx (FDX) , it is very likely that there will be a continuation of the Fed's dovish bias. The FedEx report reflects a key problem with hiring that is slowing down the economy along with supply issues. This has helped to ease some of the inflationary concerns and is slowing down the need for the Fed to unwind its accommodation.
I am looking for a continuation of strong pockets of speculative action. The cannabis names will be of particular interest as there has been progress in Congress on the SAFE Banking bill, which will now move to the Senate for consideration.
