The second bull trap of the week was sprung overnight as concerns about a spike in energy prices combined with higher interest rates and inflation are causing concern. Big cap technology stocks like the FATMAAN names tend to be more sensitive to interest rates, and that is where the brunt of the damage is occurring.
The corrective process has been underway for over a month now and has played out in a fairly routine manner. There have been periodic spikes higher like this past Friday and on Tuesday, but the buyers that were quick to jump in are soon scrambling to find exit points.
The process of failed bounces is what eventually creates the dismay and disgust that leads to a market bottom. Negative seasonality still continues for a while, but in about two weeks, there will be some third-quarter earnings news that will help to shift the market narrative.
What we have to watch for this morning is whether the dip buys are giving up after being burned a number of times lately. Buying big gap-down opens is almost reflexive during uptrends, but they tend to lead to some quick flipping in the market as we have now.
As I've often written, bad markets don't scare you out, they wear you out. Bottoms are formed when market players grow tired of the miserable action and don't want anything to do with stocks. That process has been ongoing for months in small-caps, but big-caps still have some selling to do to reach a good level of disgust.
Another area that needs to be monitored is sector flow. Parts of the market have already corrected much deeper than others. Are the small-caps and secondary stocks showing signs of relative strength, and are they building support levels? Typically when the indices are hit hard, small-caps suffer from a lack of bids, but we need to watch to see what the intensity of the selling looks like.
Cryptocurrencies are a safe haven this morning which tells us that there are still speculative buyers out there looking for a place to go. We will see if they pop up in other areas as the day progresses.
Traders often say that it is better that a weak market gap down rather than up to start the day. They got their wish today, but this is going to be a difficult market to navigate, especially if you are carrying too much inventory.