Momentum Monday – Massive Bounce

MarketSmith powers the charts in this video.

Last week, we talked about the potential for the FOMC meeting to become pivotal for a market bounce. This is exactly what happened. Sentiment changed after the FOMC meeting. Powell finally said that the current risks are balanced between inflation and a recession. This means that the Fed is not likely to touch interest rates in the foreseeable future unless something breaks. This was enough for the stock market to rip higher. In the meantime, interest rates and the U.S. Dollar pulled back which is usually a green light for stocks.

A few days into this bounce, one can clearly see that the worst-hit groups in the past three months outperformed by a significant margin. Typically junk outperforms either during bear market rallies or after a deep and long market correction. It can easily be the former, but we are going to give the benefit of the doubt to this rally until we see some evidence of heavy selling. 

The silver lining of last week is that there were several back-to-back high-volume accumulation days in the small-cap index – something we haven’t seen since June of this year when the stock market started its big summer rally. Another potential tailwind for the current bounce is the overall reluctance to believe in it after so many failed follow-through days in the past few months. The majority of market participants are underinvested, short, or want to get short. The first group is praying for a dip so it can enter with a tighter stop. This is not a bad approach, the problem is that when it finally happens, many will be too afraid to pull the trigger. 

Keep in mind that the indexes haven’t made a higher high yet. They are up several days in a row, so it’s only normal if there’s some form of consolidation sometime soon. The new leaders will stand out during that consolidation. 

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