Indices and commodities are bouncing sharply this morning for a variety of reasons and are trapping overconfident bears for the third time in the last six trading days.
Stocks in Shanghai bounced back 1.3%, which is a very mild recovery, but the injection of more liquidity by the People's Bank of China and increased hopes that the coronavirus is contained and not spreading as fast is helping the tone of trading.
The most powerful force in the market in recent months has been pure buying power. The bears have thrown a host of negative arguments at this market, but the buyers do not give up easily. The coronavirus scare has been the best negative argument that the bears have had, as it clearly is going to produce some economic slowing in China, but market players keep looking for reasons to buy. They do not want to embrace the negative narrative.
One of the great ironies of the recent weakness is that many bulls have welcomed it as a mechanism for buying opportunities and better entry points. While technicians have been forecasting more downside, there still is no great fear, as the weakness is viewed as an opportunity and not a crisis.
It is often said that market tops are a process and this action is a good example. Bulls simply do not give up easily even when there are some very good bearish arguments.
Some market participants are attributing strength to the confusion surrounding the Iowa caucus. There still are no results, but the rumor is that Sanders did well and the Biden campaign collapsed. That is seen as benefitting Trump and Trump is generally viewed as a market positive.
Twice last week, market action like we are seeing on Tuesday morning sucked in underinvested bulls and squeezed bears. Once sentiment developed that maybe the worst is over, the indices rolled over again. The goal of the market seems to be to convince as many folks as possible that a correction is not yet in the cards.
This is a hard market to trust, but, obviously, trying to press to the downside is not working. That doesn't mean we have to expect that a strong uptrend will resume, but we have to be mentally prepared for a market that may not fall apart as easily as many had envisioned.
I'm going to focus primarily on individual stock picking while keeping an eye on the indices and looking for the next setup. Navigating the indices is very challenging. It is easier to be a stock picker right now than trying to determine an overall market trend.