The market action was mixed on Tuesday, with slightly negative breadth and a poor reaction to results from Goldman Sachs (GS) weighing on the Dow Jones Industrial Average. There is little movement early on Wednesday as market participants await the latest Producer Price Index and Retail Sales data.
There is another week to go before we move into the most important earnings reports of the quarter, but early earnings from the financial sector were mixed, and the SPDR Financial ETF XLF is basically unchanged from where it was Thursday morning.
Technically speaking, a surge in positive breadth has created some bullish hope, but several important issues on the horizon will determine where the market is heading next.
The market has been optimistic that inflation is cooling, which may lead to a less hawkish Fed, but the big question now is whether the Fed's rate hikes already have triggered conditions for a recession. There are many pundits and strategists who are concerned that the Fed will overtighten as it battles wage inflation. Various Fed speakers have conveyed the message that they are determined not to back off too quickly.
As earnings season unfolds, the most significant issue will be whether the market's worries are shifting away from inflation toward greater concerns about slowing growth. There are already many worrying signs in areas of the economy, such as real estate and used cars, but guidance from management during earnings season will determine what the market does next.
The bulls hope that weaker earnings are already fully discounted by the market and the technical developments are giving them hope as well, but we need to stay laser-focused on the price action as we digest more economic news and key earnings reports.
The market is at a point where another counter-trend bounce could easily fizzle out, or the bulls gain confidence and push things through key overhead resistance.
We are at a very tricky junction requiring vigilance and disciplined trading.