One of the major technical shifts in the market since the bottom in 2009 is the inclination toward V-shaped bounces. The traditional wisdom is that when a market corrects, there is some retesting of the lows before a solid bottom forms. The logic is that trapped longs will look for exits into strength, and more confident bears will look to remount shorts.
While the logic for retests and pullbacks after a bounce make sense, they have been scarce in recent years. The best recent example was the pandemic low on March 23, 2020. The market bounced higher the next day, and it was pretty much straight up until early June. There was no retest and hardly any consolidation on the way up. A number of strategists found themselves on the wrong side of the action as they looked for the traditional retest, which never occurred.
The market is seeing some strong bounce action Thursday, with some of the hardest-hit stocks finally seeing some upside. Traders have to be wondering if this is the start of a V-shaped move since so many stocks are growly oversold and have been under extreme pressure for so long.
There are a couple of problems with the V-shaped bounce scenario at this time. First is that one of the primary factors that helped to create V-shaped moves was the dovish Fed. The Fed was a constant source of liquidity, so there was always some buying power out there. That has shifted with recent inflation concerns and the Fed's hawkish intentions.
A second issue is that we still have some extreme divergencies in various areas. The big-caps and indexes are still in a very early stage of a correction, while other groups like biotechnology and growth have been in bear markets for many months. This inconsistency is likely to cause rotational action that is going to be very bumpy.
I'd like to believe that the worst is over for many of the small stocks I favor, but even though they are very tempting, we still have to deal with a hawkish Fed, inflation worries, and indexes that are still extended. It looks like we have more time to shop for bargains before they start to run away to the upside.
