This Bounce Looks Like 2020, but Without Massive Stimulus How Far Can It Go?

The market bounce that started eight trading sessions ago has set some records for its intensity and consistency, but it creates a short-term conundrum for market players who are trying to position for the action ahead.

In some ways, the action was very similar to the COVID bottom in March 2000. Stocks went almost straight up for months and technical traders who were looking for a retest of the lows never saw a sizable pullback. Getting back into the market after that collapse was very tough as stocks stayed extended for a very long time.

There is one huge difference between 2020 and now, and that is the Fed. The 2020 action was primarily driven by a flood of stimulus, both monetary and fiscal. Trillions of dollars of that capital flowed into stocks and provided a substantial tailwind. It wasn't until February 2021 that some of the speculative action finally started to cool.

The current market does not have the Fed providing endless liquidity, and that has caused great consternation for market participants who have been focused on the macro picture. There is an unusual convergence of substantial negative events with war, inflation and the potential for economic slowing.

The bears are convinced that this rally is doomed, but in the short term we need to defer to price action rather than headlines.

In the longer term, inflation, war and recession will impact the market, but in the short term the market is dealing with those issues. Some market participants may think the action is wildly illogical, but trying to argue with the market doesn't pay very well.

It is clear that the market is becoming very extended in the short term and needs a rest, but that occurs in a number of ways. Markets that have been as strong as this one don't suddenly collapse and go down unless there is some surprise news or events. This move has created huge underlying support and market sentiment has shifted. That will persist for a while and has created underlying support, dip buying, and fear of missing out.

In the early going on Friday, the rally continues as united efforts to assist Ukraine are creating some optimism. We have the end of the first quarter coming up next week, and that will likely have some influence on holding stocks up after the misery that occurred to start the year.

It is tough to put money to work after this giant move, but the fact that entry points are hard is a big part of the reason why the market will keep on running. I'll continue to look for ways to put cash to work, but I'm also going to be very careful about protecting recent gains.