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  1. Home
  2. / Investing
  3. / Stocks

Bad Markets Can Give Good Bounces

After a poor start, Thursday's action showed how when stocks don't go down on bad news in times like these, the buyers can get busy.
By JAMES "REV SHARK" DEPORRE
Jun 02, 2022 | 04:34 PM EDT
Stocks quotes in this article: MSFT

We had a fine example Thursday of how the best bounces tend to occur in the worst markets.

The primary reason this happens is that investors just aren't well prepared for strength in a poor market. When it does suddenly occur, they are underinvested and very prone to fear of missing out. In addition, there tends to be more shorts that will want to cover, and speculation quickly builds that a major turn is taking place.

After lackluster action on Wednesday and a warning on Thursday morning from Microsoft (MSFT) that it's lowering revenue and earnings per share guidance, the market sold off for a few minutes at the open. The bears were unable to build traction, and when stocks don't go down on bad news, the buyers started to get busy. They figured that the worst has already been discounted.

It was a superb day of action, with breadth running more than three to one positive. There were only 90 new 12-month highs, mostly in the oil sector, but new lows of just 120 demonstrate that stocks are not even close to testing the lows of two weeks ago.

The biggest positive is that the best strength is occurring in the sectors that have been hit the hardest. It may be questionable whether the senior indexes have hit their lows, but it is not nearly as questionable for the 3,000 stocks that hit new lows two weeks ago and have been bouncing ever since.

This action helps to strengthen the charts as support levels build, but there are plenty of macro bears out there that are convinced that the market still faces significant struggles with inflation and economic growth. Those concerns help to create a "wall of worry," and that is one of the reasons that these counter-trend bounces can be quite energetic.

We have an important jobs report in the morning on Friday that will elicit a response. The bulls are hoping for some softness that will support the narrative that inflation is starting to cool.

Have a good evening. I'll see you tomorrow.

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At the time of publication, DePorre had no position in any security mentioned.

TAGS: Investing | Stocks

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