Since the bear market bottom in 2008-2009, market participants have been well-conditioned to buy the dip. Not only has the market tended to bounce very big and very fast, but the bounces have often been very powerful V-shaped moves.
It should come as no surprise that after the terrible action recently, there are quite a few market players who believe negativity has become so excessive that conditions are good for a large counter-trend move. There aren't many calls for a bottom, but there are many calls for some recovery with the S&P 500 down for seven straight weeks.
The bears contend that perhaps there will be some counter-trend action, but this market correction is unlike anything we have seen since 2009. This time the Fed is behind the curve and is facing the tremendous challenge of controlling inflation without triggering a recession. There are many indications that this is not going to be an easy task. Very poor reports from the retail sector last week helped to solidify concerns that economic growth is starting to drop sharply.
The market has been dealing with increased volatility recently, which is a characteristic of a bear market. There have been several very sizable rallies in the indexes over the past few weeks, but each has failed miserably, and that briefly drove the S&P 500 into bear market territory on Friday.
The indexes recovered late in the day on Friday, and we have some carryover momentum here on Monday morning, but the trillion-dollar question is whether a bounce can create some fear of missing out and attract some money that is sitting on the sidelines.
The dilemma is that there are plenty of market participants who are suffering their worst losses in many years, and they are much more interested in stopping the pain rather than putting more capital at risk. Strength is going to attract selling and reallocations, but if it can hold, then it is possible for a strong bounce to develop.
I've often written that the biggest bounces occur in the ugliest market, and this market certainly qualifies as ugly.
If you are going to play the counter-trend bounce game, then make sure you are very clear about time frames and do not let a short-term trade turn into a long-term investment if it fails.
This sort of market creates a tremendous amount of anxiety among traders trying to catch the exact turning point. They are anxious to make up for recent difficulties and are often more aggressive than normal.
While I will look to play some counter-trend bounces if it looks like they are developing, I will be selling into strength and will stay patient about building long-term positions. It is possible that a market bottom may form, but there will be plenty of time and opportunity to put capital to work once the market starts to prove itself.
