Since the top in the S&P 500 in December 2021, there have been six sizable counter-trend rallies. Each one has failed and eventually produced a lower low for the index.
All of these bounces have had some similar characteristics.
Each bounce has produced some very fast and sizable moves and has caused a surge in sentiment and predictions that a bottom has formed. In each case, the bounces have failed very abruptly and have trapped overconfident bulls that then panic and help to produce the new lows.
The reverses have generally been triggered by negative news. The largest bounce was in August, and that bounce failed when Jerome Powell was extremely hawkish in his speech at Jackson Hole. The four-day bounce in September failed when CPI came in hotter than expected.
After hitting new lows of the year this past Friday, the market has put together a bounce of nearly 6% in the S&P 500. If the pattern continues, this bounce likely has some upside in the near term, but there is a great risk that economic news or the start of earnings season will trigger a reversal.
Of course, the bulls will argue that it is different this time. The reason these bounces are so strong is that there is always some big money that is willing to embrace the argument that the worst is over.
Every bounce this year was premised in part on the hope that the Fed would pivot to a more dovish stance. There has been no indication that it is going to do so, but that hasn't stopped the bullish narrative from developing.
We have some reversal action in the early going on Wednesday morning, and we will quickly see if the strength of the last couple of days has created some dip-buying interest. Typically these bounces have reversed very aggressively, and there hasn't been much support once they turn.
At this juncture, this is just another bear market bounce with a high risk of failure. It is up to the market to prove that it is different this time, and so far, it isn't doing a convincing job of it.