Tuesday, we had a particularly good illustration of how the best rallies tend to occur in the worst markets.
The indices have been trending down for a couple of weeks and have suffered some substantial technical damage, yet they produced the second-best gains of 2019 on no real news.
Nothing has changed as far as trade with China and Mexico and there was no major improvement in economic news. The one thing that did occur were some benign comments by Fed Chairman Jerome Powell.
Powell didn't say anything new but he made it clear that a rate cut would be appropriate if the economy weakens and inflation stays low. There is a growing belief that the Fed is going to cut rates soon and Powell is very open to it.
What is most fascinating about the action on a day like this is how the negative narrative that has been driving the action lately is totally forgotten. Nothing changed but market players set aside the worries and fear of missing out (FOMO) takes hold.
The intraday momentum is generated by a combination of poorly positioned market players, squeezed bears and a sudden fear that the market is going straight back up. It is an excellent illustration of why the best bounces come in poor market environments.
The question now is whether the bulls can build on the strength. Many are convinced that a V-shaped bounce is likely. Two weeks ago we had a three-day bounce after a sharp pullback and it lasted long enough to convince many that it was clear sailing to the upside.
The big issue the market is going to face in the near term this time is the Mexican tariffs. Many market players, including me, think it's unlikely that they will go into effect. However, if a deal doesn't look likely pretty quickly, the selling should to pick up fast.
Many market players are breathing a sigh of relief and are feeling confident that we have seen the lows. While the bounce Tuesday was strong it isn't sufficient to push the indices into an uptrend.
Have a good evening. I'll see you Wednesday.
