The bulls hoped the market would be able to build on last Friday's strong action, but the upside momentum fizzled out quickly on Tuesday and triggered another round of selling.
Friday's action was primarily driven by the rebalancing of major indexes. If it wasn't for that, volume would have been weak, but the business media and many technicians didn't understand how this was not pure buying by motivated funds that thought there was great value in the market.
The move held on Monday, but all it took on Tuesday to send stocks back down was more concern about inflation, higher oil prices and debate about a potential recession. The bulls hope that this long list of negatives can be discounted by the market, but it will not be an easy task when there is so much economic uncertainty.
While the market is very focused on the hawkishness of the Fed, many market players fail to understand how higher rates and the shrinking of the Fed's balance sheet will impact trading. We have not had this dynamic since before the recession in 2008-2009, and many traders have grown so used to the liquidity that the Fed provides that they have little comprehension of how much stocks have depended on the Fed.
The failure of the bounce yesterday is a good illustration of how V-shaped bounces just aren't as likely to develop as well as they have in the past. It is not a complex matter. When capital is more expensive and there is less of it flowing into the market, then stocks just aren't going to go straight up.
That doesn't mean we won't have some strong counter-trend bounces, but it puts a premium on more aggressive trading. This is not a market that is going to bail out bulls who are overly optimistic.
The biggest danger I see in the market right now is the desire to do something. The easiest thing to do is to keep trying to anticipate a significant market low. Calling for a significant low is what market participants will do when they want to do something. There is a natural inclination toward taking some sort of action, and after all the misery that has been suffered lately, it seems too late to sell.
There just isn't going to be much to do in this market for a while. There may be some short-term trades and perhaps a few buying opportunities in stocks that have really been hit hard for no real reason, but it just isn't the right time to be active. Stay patient. The time will come, and it will be glorious.
