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  1. Home
  2. / Markets

An Oversold Bounce Is Developing -- But Don't Be Too Trusting

Now is not the time to build longer-term positions.
By JAMES "REV SHARK" DEPORRE
Jun 21, 2022 | 07:35 AM EDT

The market is set to rebound Tuesday morning after the S&P 500 lost a massive 5.8% last week, which was the worst performance since March 2020, when the Covid pandemic took hold. The primary catalyst for the very poor action was an interest rate hike of 0.75% by the Fed.

Market participants were hoping for a positive response to a very aggressive Fed, which has been "behind the curve," but the bounce buyers were caught in a nasty bull trap on Thursday and unable to recover on Friday.

The new week is starting with a sizable bounce in the early going, but there is intense debate about whether a series of 0.75% interest rate hikes will derail the economy and send it into a recession.

The Fed and President Biden are sending the message that a recession is not inevitable, but many economists don't see how inflation can be tamed unless there is a substantial rise in unemployment and much slower growth.

The recession debate is going to be the primary issue for the market to grapple with as we move forward. It is likely to remain quite murky and unclear and will likely keep volatility high.

We have a classic oversold bounce in the early going on Tuesday morning. The big question is how far it can carry before stuck longs, and short-term flippers start to hit the sell button. Quite often, a bounce off the lows that follows a poor week can gain some good momentum as the fear of missing out starts to develop, but we seldom have had more big-picture negatives than we have now.

The biggest problem that this market faces is that it is already in a bear market as the Fed is looking at a series of substantial rate hikes and quantitative tightening. There are no indications that inflation is under control and the worries about a potential recession have been building rather than declining.

While it is possible that all the bad news has been fully discounted, it is not likely there will be a sustained recovery at this point because there is such a high level of uncertainty.

My game plan is to play some bounces if I can but not worry about making longer-term buys right now. The charts need substantial work before good entry points develop. An oversold bounce may be tradable, but it cannot be trusted to last for long.

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At the time of publication, Rev Shark had no positions in any securities mentioned.

TAGS: Economic Data | Economy | Federal Reserve | Futures | Indexes | Interest Rates | Markets | Rates and Bonds | Stocks | Trading | U.S. Equity

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