The market is enjoying some positive volatility on Thursday, as it digests the fallout of the banking crisis and a half-point interest rate hike by the European Central Bank. Stocks are gaining some traction after a slow start, which is likely driven by short-term trading and structural issues like short-squeezes and zero-day options action.
The ECB and various government agencies in the U.S. continue to provide reassurance that it will deal with the problems in the banking sector. The fact that the ECB went ahead with plans to raise by a half percentage point demonstrates that it didn't feel it was necessary to sacrifice its battle against inflation to deal with banking issues. In the U.S. the odds that the Fed would not hike at all at its meeting next week have declined to 21% from 45% yesterday.
Fed Fund Rates have been seeing very large swings on a daily basis as the market is trying to measure how much the banking crisis will impact the Fed's level of hawkishness. Strategists have been increasing their probability of a recession, and the market is now viewing weak economic news as a negative rather than a positive as the main issue shifts from inflation to recession.
The market does not have much news flow on the agenda until the Fed meeting next Wednesday, and that is allowing short-term traders to generate some short-term strength. As I discussed this morning, there has been a rotation out of financials and oil and into technology, which is gaining some traction, especially in the semiconductor sector. The big-cap technology names also benefit from the perception of being safe havens as other sectors struggle.
I'm more inclined to sell into this strength at this point, but these sorts of bounces can go further than anticipated, especially when zero-day options on the indexes are in play as they appear to be now.
Most charts are still a mess and will need time to develop, but a bounce is always a good first step in establishing a potential bottom. As a stock picker focusing primarily on trend trades, I don't consider this a good time to buy.