Rev Shark:
Fed-Induced Lovefest Might Be Seeds for Market Change
"It is not the strongest of the species that survive, nor the most intelligent, but the one most responsive to change."
-- Charles Darwin
Following one of the slowest and most dreary trading days of the year Monday, the market provided some very interesting drama Tuesday. Market participants started off the day looking particularly negative. Breadth was 3-to-1 negative and sellers were throwing stocks into the deep dark abyss in efforts to appease the stock gods.
We actually had a taste of the much discussed but seldom-seen phenomenon of capitulatory selling, where investors simply give up in despair and sell with little regard for price in order to escape their misery.
Negativity was at extreme levels when the FOMC released the minutes from its March meeting. There was some talk about inflationary pressures but indications were that the FOMC would not be making half-point jumps in rates anytime soon. In addition to the easing of concerns about inflationary pressures crude oil was down almost $2.
The combination of intense negativity and news that wasn't nearly as bad as many had feared set the stage for a big, bold rally. Volume picked up sharply and the buyers drove us higher for the rest of the day. What looked like the start of another leg down in the morning had turned into an impressive day of accumulation by the close.
The big question now is whether the market is undergoing a meaningful change, or the action yesterday was an aberration that will soon be forgotten as our struggles continue. Obviously we can never be certain but there are some reasons that we may want to become more adaptive and be increasingly responsive to the possibility of change.
There have been two major concerns dogging the market lately: higher oil prices and inflationary concerns. The market has been struggling with pricing in the possibility of increased interest rates in the future. Although it has been obvious for some time that inflationary pressures have been increasing, the market lost its composure when some actual signs of those pressures became apparent.
The action yesterday is a sign that maybe the market is beginning to feel that inflation and interest rate hikes are now starting to be more fully priced in. Recognizing the problem and preparing to deal with it is the first sign of health.
In addition to grappling with inflationary pressures, the market also got some help from a steep drop in crude oil prices. That weakening was ignored the past few days but after the big reversal yesterday it may become more important.
A third positive is that we are now entering earnings season and, believe it or not, there are going to be some good reports for the market to consider. There will be some disappointments as well, but there should be some good news for the bulls to focus on, and that should help attract some money.
We aren't out of the woods yet but there are promising signs of change afoot. However, we need solid follow-through at some point -- it doesn't have to be today but fairly soon. The buyers have to show that they are willing to step up.
I received an awful lot of comments from readers about how this market is doomed to continue its descent. There is a lot of negativity and bearish sentiment is quite high, which is a positive.
We have a quiet start shaping up this morning. Oil is down once again and overseas markets are mostly positive. It is promising to be a very interesting battle.
