We all know that after the excessive 9-day move, a consolidation of some form is natural and even needed, either through time or price. For the rally to continues, we’ll need to see new breakouts sticking and new leadership to emerge. Currently leadership is still thin and represented by old, well-known stocks.
Sentiment continues to be very volatile and driven by short-term price moves. Sitting and waiting a few days until the picture becomes clearer is a sound approach here.
Arguments could be made for both the bullish and the bearish market scenario
Bearish:
– technically extended, which limits risk appetite;
– recently heightened volatility has created a renter’s mindset. No one is willing to commit to big holdings for a prolonged period of time due to the elevated macro uncertainty;
– breakouts are failing across the board;
– defensive groups are still leading – utilities, tobacco, discount stores;
– Market reaction to earnings has been terrible so far.
Bullish:
– The worst case scenario for Europe might have been already priced in, at least for now. (to be honest, it’s still unclear what would be the consequences of a credit event related to Greece aka will the bond holders get scared and require much higher yield for Italian bonds?);
– We are in the 3rd year of the presidential cycle, which historically is very strong in terms of performance;
– With Nasdaq and SPX almost positive for the year, performance anxiety could drive institutional investors’ decision making for the rest of the year;
– the expectations for this earnings season are excessively low, meaning that companies have a low hurdle to meet and surprises could be plentiful.
