Is the Market Setting a Trap for the Chasers?
The bulls may have the ball, but bounces like these have a 'job' to do.
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A weaker-than-expected PPI report helped to trigger a solid day for the market Tuesday. Breadth was very good at better than three to one positive. Virtually all groups except for energy were in the green. Big-cap technology and the Nasdaq 100 QQQ led with a gain of 2.5%.
This is the sixth day of bounce action following the sharp drop from the recession and yen-carry trade scare last week. The indexes have recovered nearly all of the losses and are now heading into overhead resistance at those old levels. It is a natural place to put on some shorts. The bounce on Tuesday was probably aided by some "don’t short a dull market action."
The fears of a recession seem to have been forgotten for now, even though the weak PPI isn’t a sign of a strong economy. Retail sales numbers later this week could stir up economic concerns once again, but for now, the market is happy that the Fed is very likely to cut rates soon.
I’m not convinced that it is clear sailing from here. Bounces — after the sort of crash-like action we saw a week ago — tend to go further and last longer than many think is possible. The job of those bounces is to suck in buyers who are afraid they are going to miss out on buying the low if they don’t rush back in. Those chasers quickly turn to sellers when the market can’t overcome resistance levels.
The action had a good feel on Tuesday. It wasn’t overly euphoric, and it was quite broad. The economic fears disappeared, and traders felt good about the gains. However, I remain concerned about seasonality and the sort of complacency we saw Tuesday, which is a good setup for a trap.
The bulls have the ball and are in control, but stay alert for a quick shift. Retail sales could be a negative catalyst that causes concerns again about the economy.
Have a good evening. I’ll see you Wednesday.
