Market players have been caught by surprise as technology and small-cap stocks have enjoyed their best positive momentum since last year. The thing that has been most surprising about the action is that there hasn't been any clear catalyst. Nervousness about coming earnings reports has been set aside, and so far, mediocre earnings are finding some buyers.
There are arguments that the market has already priced in the worst concerns about inflation and slowing growth, but that assumes it is possible to know where the economy will be months from now.
Regardless of the justifications for the strength, it has been strong enough to convince some folks that a significant bottom has formed and that a sustained uptrend is about to build.
It is possible, but next week the strong positive momentum is going to collide with the most important earnings reports of the quarter and with the Fed interest rate decision. This run-up into the news creates the danger of a 'sell the news' reaction; however, if the market can handle the news and finds support, that will be a major positive.
The European Central Bank is set to raise interest rates for the first time in 11 years here on Thursday, which has helped the euro to regain some traction against the dollar and has been part of the catalyst for the recent market strength. The ECB hike is well-anticipated, but central bank action often triggers a market reaction even when it is not a big surprise.
The biggest challenge of the market right now is that this abrupt move by many stocks has made entry points very difficult. As Investor's Business Daily notes: "A lack of buying opportunities at the moment is a hard-to-ignore flaw of the current confirmed uptrend. Put another way, it is still not the time to be aggressively chasing gains."
The action of the last couple days does create fear of missing out and there is often a tendency for the market to stay sticky to the upside rather than suddenly reverse, but there is a very clear danger that this could be little more than just another bear market bounce. As we have seen quite often, these bounces can fall apart quite fast. The mood tends to shift quickly in bear markets.
My game plan is to continue to look for new buys, but I don't expect to find much. My time frames remain short and I'll keep stops quite tight. I'd very much like to build some longer-term positions, but I still do not believe that I should be rushing to deploy precious cash.
We have some substantial events occurring in the next week and we will have a much better idea of overall market health once we see the market response.