The indexes have been rampaging higher lately and a hot employment report gave the bears the opportunity to shift the focus back to inflation. However, the bulls regained control of the economic narrative and continued to push the market higher.
The narrative could have easily been that the Fed's hawkishness is not slowing the economy and inflation is becoming entrenched. Instead, the market embraced the idea that the Fed can be even more aggressive at raising rates because the economy and employment are doing so well and can withstand the pressure of another 75-basis-point hike.
There are strong views on both sides of the market debate, with many bulls convinced that the market has bottomed, inflation has peaked and a strong economy will help to drive the market higher.
The bears are scoffing at the idea that the market can continue to trend higher when there is an unprecedented combination of a very hawkish Fed, the highest inflation in 40 years and signs that the economy is starting to slow. Fighting the Fed has never worked well when the market was in bull mode, and it is questionable whether it can work when the Fed is becoming even more aggressive at hiking rates.
Whether the recent jump off the June lows is a significant bottom or just an energetic bear market rally really isn't the important issue right now. The important issue is whether there will be consolidation or pullbacks as earnings season winds down and we head into the dog days of summer. This is the weakest time of the year seasonally, but it sure doesn't seem that way based on the mood of the market.
The recent rally was driven to a large extent by very poor positioning. Market players simply were not prepared for this much upside and they struggled to add exposure. Shorts were squeezes and fear of missing out helped to drive the momentum as well.
It is difficult to know when such strong action will finally weaken, but watch for intraday reversals. We have the July Consumer Price Index report coming up on Wednesday and that will be an important catalyst for a move. We are running very hot into that news, which may set up a "sell the news" reaction even if the numbers are market-friendly.
We have some Monday morning strength as biotechnology continues to offer takeovers and good news.