The market ignored poor earnings and guidance from Walmart (WMT) on Tuesday as strength in technology stocks encouraged traders that were looking for a sustained counter-trend bounce. However, the strong action turned into a horrendous bull trap as Target (TGT) confirmed that it is facing the same issues as Walmart.
These reports in the retail sector forced the market to acknowledge the debilitating impact of soaring inflation and raised concerns that a recession is on the way. Bids totally disappeared, and the indexes suffered their worst action of the year.
Pundits in the business media proclaimed that this is some of the worst action that they have seen, but if we dig a bit deeper, it appears that it was big-cap stocks and the indexes that suffered to a much greater degree than many secondary stocks. As I've been discussing for many months, the indexes and a few large-cap names have been covering up a tremendous bear market in the majority of individual stocks.
I don't know the stats on this, but I don't believe that we have ever seen a market acting this poorly while the S&P 500 and DJIA still have not fallen into a technical bear market, which is a drop of 20% from their highs.
Wednesday the indexes and many large-cap names made progress in catching up to the bulk of the market to the downside. It was notable that there were only about 600 new 12-month lows despite the fact that both the DJIA and S&P 500 had new closing lows. Last week there were over 3,000 new lows primarily due to liquidations in many stocks that have been in downtrends for a long time. That was capitulatory action in many stocks.
This bear market has been unusual because it has proceeded on a rolling basis. The indexes and big-cap names appear to be the last group to fall, but the question now is how far they will have to drop to bring us to a low. The first step will be a drop of 20% for the S&P 500 to create a technical bear market and help to create the necessary bearish sentiment to bring us to a bottom.
The corrective process is proceeding Thursday morning, and my game plan is to stand aside and let it play out. I see no reason to do any buying right now other than very short-term trades should they develop. I have a long list of stocks I like when market conditions improve, but I want to see better charts before risking precious capital.