Stocks are set to gap higher at the open this morning. If the positive action holds up, it will be the eighth positive day out of the last 10 with only one day of any significant selling.
It is classic V-shaped action, and it is particularly interesting to consider how it developed. What was most significant when the bounce started was how negative the macro situation had become. Seldom has there been such a confluence of negatives. The market had already been grappling with inflation and a hawkish Fed, and then we pile on the war in Ukraine, a huge disruption in oil and commodity markets, supply chain issues, and growing worries about the potential of a recession as the yield curve inverts.
In retrospect, it was a giant Wall of Worry, and with market players already extremely negative, there was a good opportunity to start to climb.
As the climb of the Wall Worry progressed, it created two major psychological reactions. The first was FOMO, or Fear of Missing Out. Maybe market players weren't optimistic about the worst being over, but they didn't want to miss out on a counter-trend rally. As the rally gained steam, it produced a large crowd of potential dip buyers. These buyers don't like to chase strength, but they will buy minor weakness, and when there is no weakness, they often turn into chasers.
Typically this sort of V-shaped climb of the Wall of Worry action lasts longer and goes further than many market pundits think it will. There is an inclination to call the action not just unjustified but irrational. With some meme stocks like GameStop (GME) and AMC Entertainment (AMC) attracting traders now, the bears are even more convinced that the market action is insane.
I have warned against trying to time a market top for a while now, and that continues to be the best advice that I can give. There is no way to guess how much longer the market runs. There might be overbought conditions, but that does not mean that there is going to be some sort of sudden collapse.
It is tough to put money to work with everything becoming so technically extended but keep slogging away and keep looking for opportunities in individual stocks.