After seven days of corrective action, the market bounced back on Wednesday. The action helped the mood of active traders, but it is premature to conclude that a new uptrend is about to start. Stocks have become a little oversold after the longest losing streak in months, and that was enough to attract some bottom-fishing interest.
The best bounces tend to occur in the context of market corrections. They feel good as the recent struggles are finally overcome, but the primary issue that arises is whether market players that have felt trapped during the pullback will use the strength to reposition and cut long exposure.
We have seen selling into a strength on a daily basis over the past couple of weeks. That pattern broke on Wednesday as stocks traded steadily higher, but will market players reassess their bullishness Thursday morning?
The key technical question is whether the lows that were hit at the close on Tuesday will provide support. The bullish scenario is that stocks churn a bit, hold support, and then start to work higher. The bearish scenario is that support fails to hold and that triggers sell stops and a move toward higher levels of cash.
One of the primary problems right now is that we are in a very tough time of the year seasonally. It is still several weeks before third-quarter earnings hit, and there is much debate over the level of economic growth, the continued impact of the Delta variant, and the likelihood of tightening by the Fed.
Overnight, Asian stocks struggled as Chinese economic indicators dropped sharply for the month of August. There is also concern about the largest residential real estate developer in China.
There are not many immediate catalysts for sustained upside at this point, but so far, the selling pressure over the last couple of weeks has been fairly mild. There is no rush for the exits, and many stocks are trying to hold support. While that doesn't mean they will hold, the underlying support is out there.
My game plan is to continue to maintain a large cash position, be selective with new buys, and use shorter time frames with some trades. I do not plan to build longer-term positions very quickly right now.
It is a difficult market environment, but there are pockets of very aggressive speculative action primarily in de-SPAC names, although volatility in those names is extremely high.