The market here on Tuesday is set to build on the sizable bounce that occurred on Monday. The bounce was triggered primarily by oversold conditions, but as it continues, there is a developing narrative that the Fed will make a dovish pivot sooner or later. Market participants are always looking for an explanation for a move, and hope that the Fed will start to taper its hawkishness is the most obvious excuse for upside action.
The problem is there really isn't any sign that the Fed is about to relent. There was similar action in front of the last Consumer Price Index report and in front of comments from Fed Chairman Jerome Powell, and in both cases the market sold off sharply when it was clear the battle against inflation had not yet been won.
The good news for the bulls right now is that there is no immediate news flow to undermine the hope of a Fed pivot. If anything, weak ISM news on Monday helped to create the argument that the economy is slowing fast and the Fed may start to recognize the slowdown.
There will be the monthly jobs news on Friday, and in one week we have a very important CPI report, but for now there isn't any immediate obstacle to more upside. There will be plenty of talk about excessive negativity and poor positioning to help keep this move going.
Back in early September there was a strong four-day bounce that was wiped out when a hotter-than-expected CPI number hit. This bounce is still at an early stage but looks similar.
Any time the market bounces we start hearing talk about market bottoms. That really isn't an important issue at this point, but it is the sort of speculation that attracts attention, so we will hear more talk about how the worst may be over.
My presumption is that this is just another bear market bounce, but that doesn't mean it won't last a few days and be sizable. I'm more focused on maybe reducing some positions into strength rather than adding, but I will be looking for short-term longs. Charts are still a mess and not set up well for long-term buys, but this bounce action is the first step in improvement.
