The bears finally gained a little traction on Wednesday as market participants pondered the potential for more Fed rate increases in the months ahead.
Jerome Powell has been making it quite clear that hikes are coming and that the Fed doesn't believe the war against inflation is over. However, market players have embraced a Goldilocks economic theory that has squeezed shorts and sucked in idle cash from the sidelines.
The disconnect between the price action and the bearish thesis has been one of the most severe that I can recall, but one of the main reasons that the market has stayed so strong is because there are so many bears with very high conviction levels. They are waiting for the next shoe to drop, and the longer it takes, the more they are forced to reposition to avoid sustained underperformance.
A long list of earnings reports is still rolling in, helping bullish sentiment. Disney (DIS) is up on news of a reorganization and layoffs, and PepsiCo (PEP) has OK earnings Thursday morning. Earnings this quarter have generally been mediocre, but expectations are low, and the response has been positive. That is part of what keeps the bears from grabbing the momentum.
At this juncture, the biggest obstacle for the bulls is likely to be public comments by various Fed members. They appear to be sending a well-coordinated message that rates are likely to go higher for longer. It is clear that the market is much more optimistic about the economic situation than the Fed, but the market is ignoring the Fed for now as it focuses on positive price action.
We have some intense bounce action in the early going Thursday. However, keep an eye on Wednesday's lows. If they are undercut, that will signal that the bears are gaining momentum and will put much lower support into play.
