The favorite sport of traders in a bear market is to look for oversold bounces.
It is well-known that some of the biggest and best bounces occur in the worst markets, thanks to poor positioning. But what is often overlooked is how oversold technical conditions and extreme negativity may not be very effective timing tools when there is aggressive liquidation taking place.
Two issues combined helped to keep pressure on stocks. The first was increased interest rates. Bonds of nearly all maturities were hitting new multi-year lows. The 7-10 year Bond Fund (IYR) is at its lowest point since 2011, and 30-year mortgage rates are fast approaching 7%.
As the Fed has made very clear, higher interest rates slow economic growth. That is a good way to deal with inflation, but it has the unfortunate side effect of causing recessions.
The other issue that is a problem for the market is the strength of the dollar. The dollar, as measured by the Invesco DB US Dollar Index Bullish Fund (UUP) , has gone parabolic and is at the highest levels it has ever seen since the start of the exchange-traded fund in 2007.
The problem with a strong dollar is that it causes goods that are made in the U.S. to be more expensive in other countries. According to Morgan Stanley (MS) , every 1% increase in the dollar decreases S&P 500 earnings by 0.5%. In the fourth quarter, this will decrease earnings growth by 10% if all other factors remain the same.
The combination of interest rates and a higher dollar is what is really helping this bear market to gain downside traction. Forget sentiment and oversold conditions. Those factors are not enough to offset the real problem of slowing economic growth.
Have a great evening. I'll see you tomorrow.