Since the ugly action on Dec. 24, the major indices have been up seven of nine days, the S&P 500 is up 9.5% and the Russell 2000 ETF (IWM) has gained 12.6%. It has been a substantial rally and has many market players feeling relieved, although we only have recouped losses back to around Dec. 17.
Despite this recent strength there were only 45 stocks hitting new 12-month highs on Tuesday, which is good illustration of how much damage has been done since the top was hit around the first of October. There is a very long way to go to put this market back to where it was.
The longer this rally lasts, the more comfortable market players are that the worst is over. The thing that has been most unusual about this corrective action is that it hasn't had a clear catalyst. There was much talk about trade wars with China, a hawkish Fed and the possibility that the economy was slowing. The only really concrete negative issue was the weak earnings and revenue guidance from Apple Inc. (AAPL) . Other than that, there has been little to confirm the very ugly fourth-quarter action.
There are still bears who believe the Dec. 24 lows will be visited again. They have a negative view of the big picture that includes a weak economy, an ineffective central bank, political chaos and excessive valuations. It is the same pessimistic view that the bears have held for years, but they now feel the action of the last three months confirms their thinking.
If we respect the price action the proper way to proceed at this point is to assume that the December lows will hold and that an uptrend is underway. The healthiest thing that could happen would be some pullbacks and consolidation rather than straight-up moves, but the market seems to take delight in doing what will challenge the most people.
There are plenty of market players who raised substantial cash in December and are now struggling to try to put it back to work, but they don't want to chase too much in case there are some pullbacks and retests.
The best advice I can give at this time is to focus less on overall market direction and more on individual stock selection. When the market corrected, stocks moved in tandem because the selling took place mostly in big baskets. All stocks were punished to much the same degree, which means many were unfairly treated.
Now that a bounce is taking place we are starting to see pockets of individual stocks outperform. Stock pickers are looking for those names that are the most mispriced. In addition, earnings season is fast approaching and there are sure to be a crop of new winners as the numbers are posted.
It is never easy to navigate a market that goes straight down and then straight back up, but if the worst is truly over then we will see more opportunities to enter individual stocks as this develops further.
Trading the indices is a different matter, especially if you have a shorter time frame. The indices are now very extended and there is risk of a "sell the news" reaction to headlines. However, as we saw on Tuesday, there are some dip buyers lurking and they went to work.
It would be much easier if the market pulled back and consolidated its recent big gains, but if it was easy it wouldn't be so potentially lucrative. The market is looking much healthier, but it isn't going to make it easy for use to find entry points.