Last Friday's energetic rally sputtered out on Monday, but there is renewed energy here on Tuesday morning as market participants await comments from Fed Chairman Jerome Powell and the latest retail sales data plus contemplate a reopening in China. There isn't any obvious positive headline this morning, but there is optimism that some of the worst news may already be discounted by the market and that Powell will be positive when he speaks at 2 p.m. ET.
Bulls were disappointed that there wasn't stronger momentum on Monday, but it was not negative as the gains on Friday were consolidated. Technology and high price-to-earnings growth names lagged, but some of the hardest-hit names in groups such as biotechnology attracted bargain hunters.
The indexes have taken the first step in a potential turn, but they now need to take the second one, which is a technical follow-through day. The rally that occurred on Friday needs some confirmation, and the best form of that is another very strong day a few days later on elevated volume. If that were to occur, then there would be a confirmed uptrend using the methodology developed by Investor's Business Daily.
There are quite a few Fed speakers coming up in addition to Powell, and there is hope that their comments will result in greater clarity about the likely pace of interest rate hikes. The consensus seems to be that there are going to be at least two more half-point hikes at the next couple meetings, but the market also is indicating that the potential for a three-quarter point hike is not insignificant.
If Powell is not at least a little positive, then the market could turn down very quickly. The biggest worry at this point is that the Fed rate hikes will trigger a recession. Goldman Sachs raised concern yesterday about the likelihood of a recession, and there is a tremendous amount of skepticism about the Fed's ability to engineer a soft landing.
We'll see what the market can do with this gap-up open, but it can be easily derailed by the wrong comment from Powell. The good news is that we have a bullish technical pattern developing, but it needs more work before we can act on it.
