The Wall Street Journal is reporting that the Nasdaq has risen more than 20% off the lows in June, which means the bear market for that index has ended. Many market participants will dispute that definition, but the power of this recent bounce has forced them to at least consider that this is more than just a counter-trend bear market bounce.
Despite the strength, the Nasdaq is still down 18% in 2022 and there were only 115 stocks hitting new 12-month highs on Wednesday. That is not typical bull market action on a day when the Nasdaq is up almost 3%.
The thing that is most notable and fascinating about the current market is the widespread skepticism. It just doesn't seem likely that the bear market can end this quickly and easily when we have inflation at the highest levels in 40 years, a hawkish Fed and a slowing economy. There were 14 years of Fed-driven market performance, but the excesses supposedly will be corrected in just a matter of months.
The bull's response is that the market has discounted all the negatives, the economy is still very strong, there are indications that inflation is dropping fast and earnings are not that bad.
The bull-bear debate is very intense right now, but even if you believe this recent action is completely irrational there is no way to guess how much longer it will persist. One of the most dangerous things you can do in a market like this is to try to time a market turn. Many market players have been doing so for weeks now, and all that has happened is that they are adding fuel for more upside.
There is an old saying that the market can remain irrational longer than you can remain solvent. That is a good concept to keep in mind as you contemplate how to navigate this action. Even if you are quite confident that the bear market has not ended and that there is going to be another significant leg lower, there is a substantial risk that the market will not cooperate.
It is very important to realize that this market rally is primarily driven by poor positioning, money flow and very high levels of doubt and skepticism. This is not driven by the sudden improvement in economic conditions, valuations or fundamentals. Market players were not prepared for this action, and they have been panic buyers as they tried to reposition.
We have a little positive follow-through in the early going and will be reacting to the Producer Price Index (PPI) report at 8.30 am. ET.