After a very energetic bounce last Friday, many market participants are looking for some upside follow-through, but very poor economic data out of China and pessimistic talk from Goldman Sachs and others are pushing futures into the red.
Traders had been trying to catch an oversold bounce for days and finally had an opportunity when a strong close on Thursday set the stage for a very broad rally on Friday. It was a classic bear market rally, but there were high hopes that it might continue for at least a few days.
Bulls were busy debating whether the selling last week was an effective capitulation that would help a bottom to form. The action on Wednesday and Thursday was the worst we have seen in this cycle, and there was no question that liquidation was taking place. However, one thing that is missing is that the S&P 500 still has not closed more than 20% off its high and has not met the technical definition of a bear market. It seems unlikely that we can have a real capitulation when most of the media hasn't even proclaimed that there is a bear market.
The bulls hope that inflation is peaking and that the coming interest rate hikes are already discounted, but the wild card is whether there will be a recession. A recession is not priced into this market, and worries about it continue to grow. Over the weekend, former Goldman Sachs CEO Lloyd Blankfein said that a recession is "a very, very high risk factor."
Goldman Sachs also revised its year-end target for the S&P 500 to 4,300 from 4,700 due to higher interest rates and slower growth. It warned that it doesn't expect a recession at this time, but if one were to occur then its target would be 3,600 based on a price-to-earnings ratio of 15.
That is not a very encouraging scenario, but it is important that we stay focused on the price action. A rally like we had on Friday is a good start, but in order to trust it to a greater extent we need a follow-through day later this week. There need to be another strong push higher on increased volume to prove that the bulls are serious.
For now, this is a bear market, and strength cannot be trusted. Stay defensive and maintain high cash levels.