The sell-the-news reaction that many market participants were anticipating finally hit on Thursday, but it was shallow and occurred at a much higher level than expected.
Consumer Price Index and Producer Price Index data were better than expected, but many market participants have already been pricing in peak inflation since the bottom in June. While inflation has slowed, in large part due to oil and gas, it is still at the highest levels in decades, and it is not clear how fast it may decelerate in the months ahead.
Bonds sold off on the news and yields pushed higher despite the euphoric action in equities. This may have been due in part to some rotational action, but the Fed is still on track for a series of rate hikes starting in September.
The immediate issue to consider is how this market will deal with overbought conditions and many technically extended stocks. This rally was driven primarily by poor positioning. Bulls had too much cash and bears who were looking for a failed bounce were crushed. The move had more to deal with liquidity and flows than a huge improvement in fundamentals or macroeconomic conditions.
The healthiest thing the market could do at this point is to consolidate or pull back shortly and establish some support. However, previous bounces this year have failed after a period of consolidation. Most notably, in early June, a trading range of about eight days eventually resolved itself to the downside, and that selloff produced new lows for the year.
There is less talk about whether this current move is a significant market bottom or just a significant bear market rally, but as the action cools, there is going to be more concern about how easy it will be for this market to continue to rally at this pace.
My current strategy has been to raise cash for this strength and to stay patient while some better charts develop. Entry points are becoming quite difficult if you don’t want to chase, but that will be fixed over time.
We have a mixed start on tap here on Friday and there are likely some dip buyers lurking, but there are lots of recent profits to protect at this point.
