Several factors are helping the market to bounce back on Wednesday morning. Worries about the banking crisis are easing, China has strength due to Alibaba (BABA) and increased economic optimism, and there is a positive response to earnings from Lululemon (LULU) and Micron (MU) .
The problem is that the strength has not been sustained recently, and there is quite a bit of rotational action and chop. A week ago, big-cap technology names (QQQ) were leading, but that group has been the laggard for the last few days. Banks have found support, but there has been limited bounce so far, precious metals have come off their highs, bonds are testing support, and oil bounced off its lows, but there continue to be plenty of stocks hitting new 12-month lows.
It is very messy action, and the primary reason for it is that there is a high level of uncertainty about where interest rates are heading and what the Fed will do next. Chances of a 0.25% hike at the May 3 meeting are around 50/50, but after that, there is a wide divergence between what the market thinks will happen and what the Fed and some strategists are indicating.
The market foresees several rate cuts in 2023, but the Fed has stated very clearly that it is unlikely. Perhaps the Fed is just trying to talk down expectations, but the market is fighting this hawkishness, and that makes economic data even more important.
There are three Fed speakers coming up on Thursday and the PCE inflation report on Friday that are likely to be market movers, but the problem in the short term is that there is unlikely to be sustained price movement in either direction until there is greater clarity.
The bulls are primarily focused on positive price action, mainly in big-cap technology and names like LULU, while the bears are focused on economic issues. There have been more predictions recently that the economy is on the brink of a recession, but the bulls are doing a good job of resisting it so far.
It is a very tough market environment unless you are a trader with extremely short time frames. There is no compelling reason to build long-term positions now, and position trading is a recipe for stopouts. I'm optimistic about the opportunities that lie ahead, but we will have to stay patient and let the right conditions develop.