The market gapped up and sold off on Tuesday but managed to hold on to some good gains. The question now is whether the bulls can generate sustained upside momentum as they digest earnings reports.
There were a few solid reports overnight. Most notably, Netflix (NFLX) , ASML Holdings (ASML) and United Airlines (UAL) posted solid beats and are trading higher. However, the issue is whether this action spills over into the broader market, which is still awaiting key reports that may give more evidence about overall economic strength and the impact of inflation.
The most interesting report coming up tonight is Tesla (TSLA) . The stock has been under pressure largely due to concerns that Elon Musk may need to sell substantial Tesla shares to fund his purchase of Twitter (TWTR) , a deal which is moving closer to resolution. It is estimated that Musk may have to sell more than $8 billion of Tesla shares, and he will be free to do so after the blackout period ends tonight when earnings are reported. Even if Tesla does have a good report, any Musk sales will be a strong headwind for the stock.
Overall, market conditions have not changed much. There was another very energetic bear market bounce and increased volatility over the last four days, and now the issue is whether support will hold and provide a foundation as we head into the meat of earnings season.
The Fed is on deck to raise rates by 75 basis points in less than two weeks, and there are no indications that economic conditions are improving. Bulls hope the market has discounted most of the bad news out there, but there is no certainty about what the level of bad news will be going forward. It is tough to discount the future when you don't know what it holds.
The key is to stay focused on the price action. The reversal after the gap-up open on Tuesday indicates there is still a high level of negativity out there, and the market may not be able to run if a high level of negativity is the main positive factor driving the action. We need actual good news rather than just hope that the bad news is already priced into the market.
My game plan is to continue to hold high levels of cash and wait for individual stock picking to improve. I will take advantage of short-term volatility if I can, but I still see little reason to rush to build positions right now. I'm not confident that earnings season is going to be a turning point for the market.
Futures have reversed to the downside before this morning's open after jumping overnight on Netflix.
