The market has been on a rampage recently, and traders are debating how much further this V-shaped bounce can go. What has been particularly surprising about the strength is that it comes in the face of a hawkish Fed and ongoing concerns about inflation and an economic slowdown.
Some bullish market participants are embracing the argument that inflation has peaked and that the market has already totally discounted a potential recession. In view of the level of uncertainty about how much the economy will slow and whether employment will say strong, it is a leap of faith to believe that the market is accurately predicting the future.
Another reason that this market strength has caught so many people by surprise is that in the last 15 years, we have never really had a strong market rally at the same time that we have had a hawkish Fed. The market has had periods of extreme strength when the Fed was providing liquidity and keeping interest rates low, but this current action is a new phenomenon. Part of the reason that the strength is so emphatic is that the market appears to be ignoring the Fed, which has been sounding increasingly hawkish the last few days.
There is still a tremendous amount of money that is not well positioned right now, and that is going to provide support in the near term. This sort of price action creates tremendous fear of missing out, and when there is FOMO, there tends to be aggressive dip buying.
There continues to be an intense debate over whether or not this is just a very energetic bear market bounce or a major market bottom. We really don't need to make that determination at this point. What we do need to do is be ready for increased volatility. This market is not going to continue to go straight up forever. There are going to be some big swings in the near future, and the way we deal with that is going to determine our market success.
This market has surprised a lot of big money that is poorly positioned, and that is why the action is so intense. These moves have a tendency to last longer than seems reasonable. The important thing is to not panic and to make sure you employ prudent buying and selling discipline.
Regardless of what the market does next, you can be confident that there will be a large supply of opportunities as volatility eventually increases.
We have mild action in the early going Thursday, but the focus will quickly turn to the July employment numbers, which will be released on Friday morning.