On Tuesday, the market provided a good illustration of how the biggest bounces occur in the worst markets. After looking downright pitiful on Monday, the Nasdaq 100 ETF (QQQ) came roaring back, completely recouped Monday's losses and added some more.
The primary catalyst for market movement recently has been the bond market, and that was the case again on Tuesday. Bonds bounced back, interest rates fell, and inflationary concern abated. That was an easy excuse to start buying some of the big-cap technology stocks once again.
The QQQ has had several bounces during the corrective action of the last few weeks, and in each situation, those gains were quickly given back. Sentiment has been shifting on an almost daily basis, but that tends to be the nature of corrective action that sucks in bulls that are hopeful that the worst is over.
There is quite of bit of rotational action taking place as the market continues to look for good support. Banks, oil, and travel have been leaders recently, but they pulled back yesterday as technology names recovered. The reverberations of this rotation are likely to continue for a while.
The big issue now is whether the indices and individual stocks can hold support and produce some upside follow-through. The Nasdaq is in a technical downtrend and had pulled back more than 10% from its recent highs. The correction could easily go deeper and spread to other areas of the market, but the action yesterday suggests that there is good support and that market players are ready to regroup and push higher.
If the market is ready to start trending back up, then we should see better stock picking as the focus shifts to stocks that were unfairly sold during the correlated selloff.
Conditions look better, but it is premature to be too comfortable with the action. The FATMAAN stocks will be a key indicator today. If they can find some support, that will bode well for the end of the aggressive rotation and more focus on stock selection.