1. Moving the markets

Finally, the markets were able to build on early gains, with the bulls at last managing to score a winning session. As I posted Friday, I suspected as much due to balanced mutual funds having to go through their monthly rebalancing efforts this week.

This move pulled the S&P 500 out of Friday’s officially reached intra-day bear market, which is defined as a drop of 20% from its latest high. Even the much-spanked Nasdaq ended up in the green with a 1.59% gain. Still, it will be a long, hard road for this index to recapture its recent 26% drop, especially after having seen seven down weeks in a row.

One analyst at Aviva investors captured the current market mood with this spot-on remark:

“Investors are trying to come to grips with what exactly is happening and always try to guess what the outcome is. Investors and the market hate uncertainty, and this is a period where they don’t have any clear indication on what’s going to happen with this push-pull between inflation and the economy.”

Despite today’s valiant effort, the S&P 500 fell short of recapturing its 4k level, as bonds were spanked, with the yield on the 10-year rising over 7 bps to 2.862%. That caused the widely held bond ETF TLT to drop -1.65% on the session, which brought its YTD performance down to -20.03%. Ouch!

The US Dollar continued its slide, and gold rebounded 0.53% to inch closer toward its $1,900 level.   

While today’s bounce gave traders some warm and fuzzy feelings, this bear market is far from being over, but it may take a pause and could very well present us with another head fake.    

1. Moving the markets

Despite yesterday’s bullish euphoria, reality set in today and informed those, who had not gotten the message yet, that we are indeed in bear market territory, in which hopeful bounces tend to die quickly.

Today’s action would be better described as a “puke fest,” with every asset class, except gold, being spanked with utter abandon. Pushing things in the wrong direction at the opening was retailer Target’s earnings and announcement about the damage inflation can do to profit margins due to higher fuel and compensation costs. The stock plunged some 25% with the fallout effect spreading to Walmart as well, which dropped 7%.

Trader’s pondering the theme “who’s next?” decided that dumping everything in sight was the best cause of action, as relentless selling picked up speed handing equities their worst day of the year.   

Not helping markets at all was big-time investor and bubble market identifier extraordinaire, Jeremey Grantham, with this comment:

“The other day, we were down about 19.9% on the S&P 500 and about 27% on the Nasdaq. I would say at a minimum, we are likely to do twice that, if we are unlucky, which is quite possible, we would do three legs like that, and it might take a couple of years as it did in the 2000s.”

As Zero Hedge pointed out, stocks have now almost unwound all of the dead-cat bounce from last week, while the S&P 500 lost its 4k level once again. It’s also questionable whether the remaining rate hikes have been priced in, with Bloomberg referencing them in this chart. In other words, there may be more downside to come.

As was no surprise, Trucking stocks were hammered, bond yields retreated with the 10-year touching its 3% level but closing below 2.9%. Gold held up well during the debacle and scored some modest gains.  

Looking at the big picture, could we see history repeating itself?

1. Moving the markets

Finally, an early advance, despite some mid-day pullbacks, continued its bullish trend, and the major indexes closed solidly in the green. Of course, the question remains whether upward momentum can be sustained in view of mounting concerns that the economy will tip into a recession later this year.

Contributing to this rebound may have been Fed chair Powell’s remarks, which offered nothing new, as Bloomberg reported:

• POWELL: WON’T HESITATE TO RAISE RATES ABOVE NEUTRAL IF NEEDED
• POWELL: WAR IN UKRAINE LOOKS LONGER-LASTING THAN FIRST EXPECTED
• POWELL: IT’S GOING TO BE CHALLENGING TASK TO TAME INFLATION
• POWELL: THERE COULD BE SOME PAIN INVOLVED

And that is what could have dip buyers encouraged to step back in, as “nothing new” was interpreted as “he could have said something worse.” While the markets pulled back initially, the hopeful meme that Powell will fold sooner rather than later, and thereby salvage equities again, like in 2018, kept the bounce alive.

If that hope is smashed, and he turns out to be serious about getting inflation back under control, all bets are off. Powell left himself wide open to interpretation with these comments:

“If things come in better than we expect, then we’re prepared to do less, if they come in worse than when we expect, then we’re prepared to do more.”

“So, the question whether we can execute a soft landing or not, it may actually depend on factors that we don’t control.”

Bond yields surged with the 10-year adding 11 basis points but stopped short of the 3% level to close at 2.992%. The US Dollar continued its 3-day slide, wholesale gasoline was heading towards the $5 level, Gold round tripped and ended unchanged.

Uncertainty reigns, and this bounce could continue into Friday’s options expirations or die on the vine tomorrow. Right now, we remain entrenched on the bearish side of the trend line.