Anyone who has started trading in the last decade is dealing with a market condition that they have never experienced before. That condition is a hawkish Fed.
In the past, traders who identified stocks that had strong fundamentals or appealing technical setups could count on price momentum to develop if they made good stock selections. Liquidity was never an issue when the Fed was keeping interest rates extremely low and creating even more liquidity by buying debt and building its balance sheet.
This Fed-generated liquidity was the norm for so long that it was largely taken for granted. There were plenty of bears who warned how the eventual unwind would be brutal, but they were wrong for so many years that it was difficult to take them seriously.
We are now faced with a hawkish Fed and contracting liquidity, but many market participants still believe the market will act much as it did over the past 10 years. Many market participants are still looking for sustained momentum and V-shaped moves to drive the market to easy recovery, although we are facing the most extreme economic challenges since 2008-2009.
This doesn't mean that stocks cannot rally, but it is very likely that they will do so in a much different pattern than we have experienced before. The recovery from the pandemic in 2020 was a classic example of how monetary and fiscal stimulus can drive the market straight up without a pause. It was a classic V-shaped move. The market rode the wave of liquidity, and many market players underestimated its strength.
We now have the inverse of that action, and it would be a mistake to assume that the market recovery this time will be swift and easy. At best, we can hope that the Fed becomes less hawkish and does not hike rates quite as fast, but there is no way it will be creating new liquidity. There also is unlikely to be any major fiscal stimulus to provide liquidity while we are battling with inflation.
We cannot trust the market to act in the same way it acted at the 2020 low or at any other time in the last decade. That doesn't mean we can't have good counter-trend moves, but be careful of believing that sustained momentum that lasts weeks or months is going to develop at this time.