Optimism that the Omicron variant will not be as severe as feared is helping the market to follow through on Monday's big bounce. Also contributing to the positive action is dovish monetary policy in China. Inflation fears have been set aside for now, but that is an issue that will continue to have a significant market impact.
The big question now is whether the market can deliver another straight-up V-shaped bounce like those that have happened quite often in recent years. The conventional wisdom is that the market needs retests and pullbacks before it can resume an uptrend, although that has often not been the case. Those that wait for better chart patterns to develop often find themselves scrambling to put money to work as stocks go straight up and fear of missing out develops.
The big bounce on Monday was not quite as energetic as it looked. While the point gain was very sizable, it came on three to one positive breadth, and not everything participated. For example, the IBD 50 (FFTY) , which is a growth stock proxy, finished with a loss, although it was well off early lows,
The challenge of this market is that traders who took necessary defensive action recently likely found themselves underinvested on Monday as the bounce kicked in. Even after that bounce, charts are still very poor, and it is difficult to put more capital to work unless you are willing to chase entry points that may not be optimal.
If this bounce is sustainable, then we should start to see a shift back to stock-picking. Traders will start to look for the names that have been most unfairly punished. Good charts start to develop for bottom fishers, and fear of missing out will quickly develop if they start to work.
This is not an easy market environment. There has been bear market action in a majority of stocks, and the correct approach has been to maintain a defensive posture. The big jump Monday helped to restore confidence, but it is hard to trust given that we now have a more hawkish Fed, inflation issues, and problems with the supply chain. In the past, a friendly Fed helped to drive V-shaped moves, and that is missing this time. The market does have positive seasonality, and many stocks are still fundamentally positive and not extended.
I'll be focused on stock-picking and trying to find some new buys, but I'm not going to be willing to do much chasing at this juncture.