The market surprised quite a few traders on Wednesday with a vigorous bounce after a gap-down open. The indexes closed just slightly negative, but the last time an oversold bounce failed, there was a complete reversal in one day.
It was a slight change in market character, but volume was very light, and the action had a random feel to it. Breadth was still very poor at around 2600 gainers to 5580 decliners, so it was clear that this was index-driven action and did not reflect a rush to load up on great bargains. It was simply a risk-on trade and probably reflected some very short-term positioning.
The big issue now is whether the market can build on the big bounce that started on Tuesday. The bears are scoffing at the narrative that the Fed is close to some sort of dovish pivot. This argument has been used to justify each of the prior bounces that have failed miserably, and nothing much has changed in the Fed rhetoric. The CPI report that is due out next Tuesday will have some impact on this.
The bulls are obviously tired of this bear market, and they want to embrace the idea that this has lasted long enough and has been bad enough that it is reasonable to expect some sort of relief at this point. It is an understandable emotion, but the stock market is not a reasonable beast and does not care about what we may think is reasonable.
What is going to determine where the market is heading is the economic news, the Fed's stance on fighting inflation, and the upcoming earnings season. Investors Business Daily notes this morning that at the end of June, it was expected that earnings for the S&P 500 would grow 8.5%. That has declined to 2.5%, so expectations have already dropped quite a bit. The key will be forward guidance and whether or not that has already been cut enough.
The pattern of the market recently has been for bounces to fail when hit with the cold, hard reality that economic conditions are not improving. The bulls are hopeful that the worst has already been discounted, but they become too hopeful about pivots, and that results in an ugly reversal.
This continues to be a market for trading indexes rather than building long-term positions in individual stocks. That is not likely to change very soon.
We have some early weakness, but weekly unemployment news is due at 8.30 am ET