Investors breathed a sigh of relief as the much-anticipated oversold bounce finally gained some traction on Wednesday. There have been a few half-hearted tries during the ugly selloff that was triggered following Fed Chief Jerome Powell's hawkish Jackson Hole comments from the other week, but they were all quickly stomped out.
Oversold technical conditions combined with some support at around 3900 of the S&P 500 finally brought in buyers after a tentative start the day. What is most notable about this action is that it is highly correlated with breadth on the Nasdaq 100 (QQQ) , running 99 gainers to just three decliners. Buyers were buying the exchange-traded funds and indexes rather than picking individual stocks, which is why breadth is so lopsided.
Index-driven action is typical of oversold bounces. When someone wants quick exposure, they buy an index or an ETF rather than single stocks. Stock picking tends to become more dominant only after there is some bottoming, and investors start looking for those names that are likely to outperform if a rally continues.
The good news about this sort of bounce is that it helps to create an obvious support level at the recent lows. If that level can hold, then charts will start to develop, and we will see better potential entry points. Charts are still extremely poor at this point, but a bounce of any sort is the first step in finding a new area of support.
So now what?
We will see if there is some follow-through, but a big bounce after a sharp decline is an invitation to do some repositioning. At this juncture, the shorts are probably not too worried about a squeeze like we had in August, but the longer the action stays positive, the more confidence the bulls will gain.
Keep in mind that we have a very important consumer price index report next Tuesday morning. This is going to be a major catalyst, and it will be interesting to see how much optimism there is in front of the report.
Bear market bounces always feel like they may be a bottom, and that is why they are chased and gain momentum. Don't worry about missing out. There will be plenty of opportunities to buy good charts in the weeks and months ahead.
Have a good evening. I'll see you tomorrow.