Now what? That's the question many traders are probably asking right now after the major indexes closed in the green Tuesday.
More precisely, the question is: Is this a setup for a failed bounce and a retest of the lows or is this the start of a fresh leg higher that will keep running on positive seasonality into the end of the year?
Following some of the worst corrective action since the Covid pandemic hit in early 2020, the indexes and many stocks enjoyed a fast and furious bounce. Many stocks went from oversold to overbought in a matter of day. But now, the bears are concerned about inflation and other macro matters. In addition, the corrective action in many big caps and the senior indexes has not been nearly as severe as what happened in many growth stocks, biotechnology, and small caps. The rotational action never really fixed the disparity between various elements of the market.
And the consumer price index report on Friday will be of particular interest.
Traditional technical analysis suggests that we should look for a pullback at this point. But back in March 2020, traders and investors that were waiting for a retest of the lows before they put money to work never had an opportunity. The market found its footing and then traded straight up for months.
Circumstances are much different now, with the biggest difference being that the Fed now has a hawkish tilt. On the other hand, for many stocks, this market topped out back in February and has been correcting for months. This was not a shallow or limited correction for the majority of stocks, but the indexes certainly provide a much different picture.
Betting on a failed bounce is a tough trade in this market, but it is likely that we will see stronger rotational action as things develop. It is growth stocks and small caps that are benefiting the most right now, but they have struggled to generate sustained momentum.
I've bought a bit on Tuesday, but my cash levels are quite high after taking stops and selling on recent weakness. I'm not rushing to buy, but Dip buying should work much better in the near term.