Investors were just a week ago nervously anticipating the start of earnings season. A few financial companies had already reported, but during the past week, key releases started to roll in from technology stocks like Microsoft (MSFT) , Tesla (TSLA) , IBM (IBM) , and Intel (INTC) .
Several analysts and pundits were predicting that fourth-quarter earnings would be weak, and this would be the catalyst that shifted worries from inflation to recession and would cause the market to roll over and retest lows.
What was most notable about this bearish forecast was how common it was. Several high-powered analysts had very similar forecasts, and they all questioned the wisdom of investors that were quite optimistic about the potential for slowing inflation, a less hawkish Fed, and a soft landing. The consensus view is that the bear market is not over.
Earnings reports were rather poor. There were far more earnings per share and revenue misses than usual, but the market didn't seem to be at all concerned. Microsoft came roaring back after the CEO said on its conference call that it would be a dead year. Other stocks shrugged off mediocre reports and attracted dip buyers.
A big part of the reason that this action occurred is that so many market players were leaning the wrong way. It makes sense that the market might struggle on signs of a slowing economy. The Fed has yet to conquer inflation, and we can expect at least two more hikes of a quarter percentage point.
The action on Friday was even more bubbly, until a steep selloff in the final 30 minutes. There weren't any great earnings reports, and economic news was mostly in line, but the market traded like it was 1999, with speculative traders piling into stocks with any minor exposure to Artificial Intelligence.
There isn't any great fundamental or even technical reason for the strong action this week, but the flow of funds drives the action. There is plenty of liquidity, many underinvested longs, and a high level of optimism about the economic situation.
The bears are scoffing at this foolish optimism, and they are already betting that the flood of earnings to come next week will not be celebrated like some of the poor reports this past week.
The market has strong momentum but is becoming very frothy, and the sentiment seems overly emotional. That doesn't mean that things cant keep running, but it is becoming quite dangerous to stay blithely bullish.
Have a great weekend. I'll see you on Monday.
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