The stock market has put together a furious rally out of very oversold conditions. Remarkably, there's little clarity or signs of improvement from some of the issues that triggered the correction in the first place like the Fed, Russia, or inflation.
Overall, the S&P 500 Index (NYSE: SPY) is 8.5% higher from its close on March 14. Following a brief move above 4,600, the market has had a sharp reversal and is off 2.3% from this high. As a result of this rally, the S&P 500 is only off by about 7% from it's all-time high.
One perspective is that the market is range-bound with the S&P 500 between 4,100 and 4,600. And, the sharp reversal following its breakout attempt increases the odds of this possibility being correct.
Another possibility is that the market bottomed on March 14 and that any dips should be bought. Buying dips is rewarded in uptrends especially in the early stages when they tend to be shallow and brief.
Of course, if this is incorrect and instead the market is more range-bound rather than bottoming, then this strategy is likely to lead to losses as the market sinks back to the bottom of the range.
Therefore, the market is at an important inflection point, and it might be prudent for investors to remain nimble at this moment.
If we take a step back and look at market history, we can also see that it's common for bull markets to face a serious test in Year 2 which often manifests in the form of multi-month corrections in which sentiment and investors' allocations turn bearish. And, these corrections tend to be longer in inflationary, rising-rate environments where there needs to be enough earnings growth to offset rising rates.
It's also fair to note that market conditions have turned sufficiently bearish for a reversal in an environment when the Fed is supportive when dips turn out to be much more brief in nature. And, this is also another source of confusion for investors as they haven't adjusted to the tougher trading conditions of this type of market since the early to mid 2000s.