After a very energetic V-shaped bounce following a sharp drop on Monday, stocks are ready for some rest. The action became somewhat frenzied on Thursday as fear of missing out caught up with some underinvested market players who were surprised by how quickly the market recovered this week.
One of the primary justifications for the bounce this week was that the damage from the difficulties of Evergrande Group in China would be contained. However, a key deadline has passed for payment on dollar-dominated bonds, and that is causing some renewed concerns about how this crisis may unfold.
In addition to Evergrande, bonds suffered a meaningful drop on Thursday, which is pushing yields higher. That didn't seem to be of much concern yesterday, but it is now receiving more attention.
Another issue that is weighing on the market here on Friday morning is that the China central bank has declared that cryptocurrencies are not legal tender for transactions in China. Bitcoin and Ethereum are trading down about 5% on the news. China has attacked the cryptocurrency market several times this year, but it has bounced back fairly well each time.
Technically speaking, stocks went from overbought to oversold in a matter of a few days as the V-shaped bounce gained traction. They are entitled to some rest and consolidation, and -- as is usually the case -- they are finding some news flow to justify doing just that. The bigger question now is how quickly they will find support and whether the strength of the last few days has created a new crop of buyers who will be quick to buy dips.
Overall, the technical action of the market in recent weeks has been textbook. There were a couple weeks of corrective action that coincided with weak seasonality, a day of panic triggered by the Evergrande crisis, a V-shaped bounce, and now here we are setting up for the next stage in the market saga. There are still a few more weeks of negative seasonality to contend with, but third-quarter earnings are coming soon and then we will start hearing about how November through January is the best time of the year for the stock market.
At this point, my game plan is to manage positions and do my best to protect recent gains. I am still holding high levels of cash and will be watching for entry points at support levels and as charts develop further.
We are likely due for some rest after a furious V-shaped bounce, but that isn't a bad thing. This is not a market that is likely to suddenly collapse again and take out key support levels that formed on Monday and Tuesday.