After a disappointing bounce attempt on Wednesday, the market is giving it another try Thursday morning. Despite some chaos in the UK over the Brexit plan, which is hurting the pound, early indications are higher, but buyers remain tentative.
Market players were hopeful that Fed Chairman, Jerome Powell, might say something market friendly in a speech Wednesday night, but he stayed true to course and emphasized how the Fed would remain "data dependent." He shrugged off the recent market volatility as something that the Fed considers, but not something that is going to motivate it to act in the near term.
While there was nothing in the Powell comments to goose the market higher this morning, there was nothing overtly hawkish that should hurt it, either. Powell expressed his believe that the economy is in a great spot, which likely means that the Fed remains on the same path toward future rate hikes at this time.
Oil tried to bounce yesterday, but inventories came in higher than expected and that created a little renewed pressure. It is natural gas (UNG) that has been producing the really crazy volatility -- and there are comparisons between some of the leveraged natural gas ETFs like Velocity 3X Inverse Natural Gaas ETN (DGAZ) and some of the ultra VIX instruments that blew up back in February. This is adding some instability to the market and will be beneficial as the volatility slows.
The action in oil and natural gas is a good illustration of how the market is more impacted by things unrelated to fundamentals when it goes through corrective action, like it is now. Much, if not most, of the selling is due to reasons that have little to do with the prospects of individual stocks or their fundamentals.
The biotechnology sector (iShares Nasdaq biotech ETF (IBB) ), for example, is down more than 20% since the end of September, which is causing redemptions in hedge funds -- and that causes more selling in the sector. Many of the stocks have come down to attractive levels, but when cash is leaving the sector, they continue to sink.
The good news is that this ugly correction is occurring at a good time to set up for some recovery into the end of the year. I do not suggest that it is time to rush out and start buying for a bounce, but we should be watching carefully for some signs that a turn may develop.
Probably the most likely catalyst will be some optimism about the framework for a trade deal with China, but that is going to be an issue that won't be resolved easily. Stocks in China seem to be reflecting more hope of progress, but the skepticism in the U.S. is very high.
My game plan is to stay in defense mode and to keep timeframes short. The best bounces come in poor markets, so I'll be looking for some trades if strength develops, but there is no reason at this time to believe that this market is going to start trending higher.
