The price action bulls rolled over the economic bears again on Tuesday. Concerns about the banking crisis and Wednesday's interest rate decision were ignored, as buyers rushed to put money to work. Breadth was three-to-one positive, and the list of speculative movers increased nicely.
The action is similar to what we saw in January, when confident bears were predicting that poor earnings would trigger recognition that stocks were overvalued and a recession was coming. The market ignored the pundits and produced an epic short squeeze combined with a dose of fear of missing out.
The same thing is happening again, but this time it is the banking crisis that is supposed to trigger recognition of the economic pain that lies ahead. Most everyone agrees that the Fed is in a very difficult position as it has to balance the fight against inflation against the harm that more rate hikes will do to banks with balance sheet woes.
What the bears are missing is that the bank rescue has created more confidence and a lot of liquidity. Bailing out banks has undone a large amount of quantitative tightening, and that money is finding its way into both equities and bonds.
The bulls are justifying the action, but claiming that the Fed is about to stop raising rates and that inflation is now under control. What they don't address is the potential economic slowing that may lie ahead as banks tighten lending standards and unemployment starts to increase.
The uncertainty into the Fed meeting on Wednesday is about as high as it has ever been, but the market's lack of worry is also at extremely elevated action. That is a recipe for a high level of volatility. Technical conditions are good for a "sell the news" reaction, but nothing is coming easy for the bears lately.
Have a good evening. I'll see you tomorrow.
