Bears Looking for a Sudden Market Collapse Are Likely to Be Disappointed
Persistent dip buyers probably will thwart a big pullback.
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The market has advanced on 11 of the last 13 trading days and is enjoying its best rally of the year. The move has been fueled by a combination of positive seasonality, softer inflation data and hope that the economy can avoid an ugly recession.
The bulls are enjoying powerful momentum, but the question now is when they will take a rest. Typically, momentum goes further and lasts longer than seems reasonable. Strong moves create fear of missing out, which results in market participants chasing strength. The bears scoff at this behavior as emotional and illogical, but they are often surprised by how stocks can stay sticky to the upside.
Twice in the past week, the bears were caught in ugly traps just when they thought the market was about to roll over. The first time was a week ago when there was a poor bond auction and hawkish comments from Fed Chairman Jerome Powell. The second time was on Tuesday, when the October Consumer Price Index (CPI) data came in lower than expected.
The bulls have now embraced the narrative that the Fed is done with rate hikes and that the battle against inflation is essentially over. The Fed is not going to declare victory at this point as it has concerns about a rebound, and there likely will be a number of Fed speakers who express caution.
Bonds have been less celebratory about inflation than stocks. There was a rally on the CPI report, but much of it was reversed in the last two days. Bonds are back up here on Thursday, but the issue with bonds is that they are not only sensitive to inflation but also will be viewed as a safe haven if worries about a recession start to build.
By just about any measure, the indexes and many stocks are very extended. That doesn't mean they are going to reverse and go straight down. The issue is how they deal with overbought conditions. They could stall out and churn for a while or pull back to support levels and consolidate.
Bears looking for a sudden and sizable collapse are likely to be disappointed for several reasons. First and foremost, this strong action has created a crowd of folks who want to buy pullbacks and dips. Many investors will not chase strength when stocks are extended, but they will be aggressive at buying minor weakness. Dip buyers will persist until they fail several times, which is why things don't tend to fall apart without surprise news.
There are negative responses to earnings this morning from Cisco Systems CSCO and Palo Alto Networks PANW , which is weighing on the Nasdaq 100. We will see if that triggers some broader selling, and we'll also see how much interest dip buyers have when most everything is still quite extended.
This is a strong trend and it has a number of things going for it. The price action will need to undergo a significant change in character to give the bears some traction, and that will not be easy.
At the time of publication, Rev Shark had no positions in the stocks mentioned.
