Feeling Relieved? Here's Why You Shouldn't Trust This Bounce
This is not the time to get complacent and let your guard down.
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Bounce action started slowly on Tuesday morning, but it gained traction as the day continued and created some FOMO among traders who were afraid that they missed buying a market bottom. Breadth was very good, and the indexes recovered a big portion of Monday’s losses, but there isn’t any reason yet to believe that the worst is over.
When selling is as intense as we saw on Monday, a rebound is almost reflexive. The market’s best days almost always occur in the context of ugly corrective action. The fact that there was some giveback in the last 45 minutes of trading shows that there is still plenty of concern about the market's health.
It is possible that the market will continue to trend higher from here, but the conventional wisdom is that V-shaped bounces should not be trusted. The best bottoms require a retest of the lows and then an upside follow-through before they can be trusted. There is significant overhead resistance, and many holders will be happy to escape some positions with losses that aren’t nearly as bad now as they were on Monday morning.
On Monday, there was near panic about the need for interest-rate cuts. The chances of a half-point cut on or before the September meeting hit 85%. That reversed lower to around 70% Tuesday, and bonds fell sharply as well. The concern about the likelihood of a recession has been very emotional, and it will come into play again when we have more economic news. The only thing that is coming up this week is weekly unemployment claims on Thursday.
Lots of folks are feeling relieved after the rebound on Tuesday, but this is not the time to be passive and complacent. The risk of another selloff is very high. Once again, the action was highly correlated, and there wasn’t much rotation. That means it is driven from the top down, and the risk of more macro movement is elevated.
Stay vigilant. We are likely to have another bout of elevated volatility very soon.
Have a good evening. I’ll see you Wednesday.
At the time of publication, Rev Shark had no positions in any securities mentioned.
