Since the start of 2023, the Price-Action Bulls have dominated the stock market action. They crushed the Economic Bears and caused a major short-squeeze. The action was largely driven by a combination of liquidity created by Japan and China, poor positioning, and FOMO.
The bulls developed a narrative to support the positive price action, but it was based on the belief that the Fed would make a dovish pivot as inflationary pressures cooled and avoid significant economic slowing. It was a Goldilocks scenario, and many bears were convinced that it just was not possible.
The problem for the bears was the positive price action lasted far longer than many thought were justified or possible. Even when the Fed clarified that interest rates were going higher for longer than previously thought, the market refused to crack.
Finally, last week the combination of higher-than-expected PPI and CPI, plus some hawkish comments from Fed members about a 0.5% hike, caused the market to stumble. The bullish narrative had some obvious flaws, and when the price action started to shift, the bears finally gained some confidence.
On Tuesday, earnings reports from Walmart (WMT) and Home Depot (HD) helped to solidify the bearish narrative that earnings estimates were too high, inflation was still sticky to the upside, and the economy was slowing. The sellers went to work, and the market was hit with the worst selling of the year.
The issue now is how much deeper this selloff will go before the market finds support.
At the start of the year, some big-name strategists like Mike Wilson of Morgan Stanley (MS) predicted that the market would undercut the lows hit in 2022 in the first half of the year, which would lead to a bottom in the bear market. That looked terribly wrong for the last six weeks, but now it doesn't look unreasonable.
Our job currently is to navigate the current weakness and be in position to eventually profit when the next uptrend begins. The market is clearly at risk for more downside at this point. There is some technical support, and there is likely to be some rebound after the pounding that occurred on Tuesday, but the problem is that the economic news will not provide a tailwind.
Bond yields are higher, with the 10-year Treasury yield jumping to 3.95% from 3.37% to start the year. This is close to the highest level since 2008.
The Fed minutes will be released this afternoon, but they are unlikely to be market-friendly. On Friday, there is an inflation report that could have an impact, but expectations now are for three more rate hikes of 0.25% at the next three Fed meetings, and that is going to be a major obstacle for the bulls.
