Investors started the week trying to catch a bear market bounce. They did a nice job of ramping up the market on Monday, but it was a deceptive move with the Dow Jones covering up mediocre breadth. The move turned into a bull trap, when Snap (SNAP) issued a dismal report that helped to confirm the worries about economic slowing that Walmart (WMT) and Target (TGT) had triggered earlier.
The market narrative has been shifting from concerns about inflation to concerns that a hawkish Fed was going to cause a recession. There were some struggles with this on Tuesday and Wednesday, but the negative sentiment turned out to be the setup that was needed for a very aggressive bear market bounce that started on Wednesday afternoon.
The market roared higher on Thursday and Friday on excellent breadth as the fear of missing out started to build. When stocks run up in this manner, plenty of folks that are worried that they missed out on the turn, and that helps create some "climbing the wall of worry" action. The negatives are still very obvious, but buyers start to put more capital to work as the positive price action continues.
At this point, this is just a typical bear market bounce, but usually, what happens is that a growing number of folks start to embrace the idea that it is not just a bounce, but a full-fledged bottom. The longer the strength continues, the stronger the conviction that the worst is over, and it is now clear sailing from here.
Counter-trend bounces tend to last longer than seems reasonable, and that is what helps to create more positive sentiment. It is very easy to underestimate how long these bounces can last.
I have no idea if this is just a bounce or a significant bottom, but it really doesn't matter. We need to embrace the positive price action while it lasts and make sure we are ready to hit the sell button if there is a rollover and a breach of support.
All week I've been discussing how the sharp drop in new lows is making me more bullish on the market. This has been a rotational bear market, and many of the worst stocks now have good charts with significant support. We will see if they hold, but if they don't, we have some clear stop-out levels.
Many folks will be breathing a sigh of relief, but you can be sure there will be a parade of bears to tell us how bad things really are. The one thing we can be sure of is some high levels of volatility.
Enjoy the long weekend, and I will see you on Tuesday.