The theory of contrary investing and trading is that when everyone is bearish, then there aren't many sellers left, and stocks are likely to rally. It is very difficult to time accurately, but we had a particularly good example of it on Wednesday.
The headline on my closing post on Tuesday was: "The Good News About this Bad Market? Nobody Likes It."
Sentiment was extremely negative, and then we had poor earnings from JPMorgan (JPM) and Bed Bath & Beyond (BBBY) and a hotter-than-expected producer price index number Wednesday morning. That caused some weakness at the open, but the selling dried up, and stocks trended higher all day on very good breadth of 6,600 gainers to 1,600 decliners. It was very broad buying, which is what tends to happen when there is program buying that is driven mainly from the top down rather than via stock picking.
While breadth was very good, it was not a wildly positive day as far as the magnitude of gains. Volume was mediocre, the pockets of momentum were fairly narrow, and the Dow Jones gained just about 1%, while the Nasdaq 100 jumped 2%.
The good news for the bulls is that according to Quantifiable Edges, Holy Thursday is up 79% of the time, and the performance on positive days is far greater than the losses on bad days. The market is closed on Friday, so market players are often in a positive mood due to the upcoming holiday. We have a little additional complexity this time as Thursday is also option expiry, and we will have some pinning action and the other usual gains.
At this point, this action is just a routine counter-trend bounce, but these often last longer and go further than many people -- especially bears -- think they will. These moves cause short squeezes and create fear of missing out, and they help to create the feeling that maybe the worst is over. It is seldom that simple and easy, but we will see what happens tomorrow.
Have a good evening. I'll see you tomorrow.
