The market enjoyed positive follow-through on Tuesday as the indexes jumped higher on very good breadth. Volume wasn't great and the move wasn't as strong as what occurred last Friday, but it was good enough to push Investor's Business Daily to raise its market outlook to "confirmed uptrend."
A confirmed uptrend does not mean we can be confident that the bear market is over, but it does shift the short-term advantage back to the bulls. There are now some obvious support levels, and if they hold we should see bullish chart development.
While the price action of the indexes looks favorable, there is some terrible action in the retail sector. Walmart (WMT) on Tuesday was hit for a loss of 11% after it reported disappointing first-quarter results and guidance, and here on Wednesday morning Target (TGT) was trading down more than 20% in pre-market action as its first-quarter earnings slumped. Both companies had the same issue -- inflation is squeezing margins and is likely to hurt demand going forward. Revenue isn't bad because inflation is driving up prices, but retailers can't raise prices fast enough to protect margins.
The market was unconcerned about this on Tuesday as technology stocks that already have been hit the hardest drove the strength. Higher interest rates were also ignored, which indicates that market players hope the worst already has been priced into the market for the stocks that are down the most.
While there has been some encouraging technical action over the past week, I am not rushing to put my cash to work. The macro environment is still full of land mines, and this news from the retail sector definitely hints at the potential for a recession. The market currently is not pricing in the likelihood of a recession, but this retail news is going to cause reflection on the issue.
I'm a selective buyer, but my primary focus is on chart development rather than fundamentals and valuation. I have a long list of stocks that I like based on fundamentals, but, as we have seen, that is little protection in a bear market. It is price action that is key, and it is improving but still is not good enough to prove that the bear market correction is over.
