Concerns about inflation, high energy prices, and slow growth continue to drive the market correction that started in early September. An attempted bounce fizzled out on Monday afternoon as the S&P 500 dropped back to levels it had hit last Wednesday.
Failed bounces of this sort are the essence of corrections, but now the question is whether recent lows will hold and help create a foundation for another recovery as we enter the third-quarter earnings season.
Sentiment has become increasingly negative and nervous, which isn't a bad thing because it means that market participants are not well-positioned for a rally, so when one does finally occur, it is going to create a "fear of missing out" and pull in capital that is sitting on the sidelines. Currently, the primary concern is being trapped in stocks as they continue to struggle and potentially retest the lows that were hit last week.
Most of the pressure is a product of dealing with the poor action in bonds. Rates have been rising even though economic growth appears to have slowed. This is prompting the use of the word "stagflation," which is the combination of slow growth and higher inflation. One of the main problems is that widespread supply chain issues are causing some of the slower growth. Much of the rise in energy prices is a result of supply issues rather than booming demand.
While the price action is looking quite poor, I continue to look for some indications of support that will provide a good chart setup as we start seeing earnings over the next month. Small-cap stocks have been correcting since February, and many of them are already washed out and have the potential for a bottom, but they need better market action to stick and a stronger rotation.
It is a difficult market environment right now as charts look poor, the news flow is negative, and sentiment is sour. Those are things that will eventually lead to a reversal, but there is no way to know when that will occur or from what levels.
My game plan right now is to:
1. Maintain high cash levels;
2. Manage positions tightly and cut losers quickly;
3. Stay selective with new buys;
4. Move incrementally with partial buys; and
5. Focus on a shopping list of names that are likely to post strong earnings.
I'd like to put much more cash to work, but until the price action improves, that won't be possible.
Futures recovered overnight, and we are looking at a flat start, but the big problem lately has been that selling picks up as the day progresses.