The S&P 500 had its largest single day of gains in two years last Friday, which has created hope that the momentum can continue as we head into the Fourth of July holiday.
The primary headline for this big jump was that worries about inflation are cooling as there are increased signs of economic slowing. Oil and commodity prices have been under pressure and inflation expectations have dropped.
The big move lacked volume for most of the day on Friday, but the Russell rebalancing hit at the close and that created a huge surge in volume, which looks quite good on the charts. This was not normal buying, but many technicians don't really dig into the reasons for the positive technical action.
The question now is whether the market can build on this momentum. In recent years V-shaped moves after action of this sort have been the norm. There has been plenty of liquidity to keep things running, and the fear of missing out helps to provide a powerful catalyst.
Circumstances this time are quite different than any time since 2008-2009. We have a very hawkish Fed, and it is on tap to raise rates by three-quarters of a point at its next meeting in July. There is very likely to be a series of rate hikes following that increase.
The market simply has not been faced with this sort of situation, and it creates a much different dynamic for bulls who hope the bad news is already discounted and the market can keep running.
As I've often written, counter-trend bounces can be extremely powerful because many market participants are not well-positioned for them. They tend to last longer and go further than seems reasonable and usually create the hope that a significant low has been hit. We saw this when the market bounced on May 20 and continued for a couple weeks before rolling over and hitting new lows.
We have the end of the second quarter coming up this week, which may help to provide some support, but this market will need to continue to grapple with both inflation concerns and the potential of a recession.
The headwinds of a hawkish Fed will be extremely difficult to overcome.