In mid-March, the stock market put together a fantastic 10% rally in less than 3 weeks' time. The rally lost momentum as the S&P 500 (NYSE: SPY) approached the upper end of the range, where it met resistance.
Adding to this were concerns that the economy is slowing just as the Federal Reserve pivots to a very hawkish stance as we got a weak GDP report, and many believe lockdowns in China could persist until the CCP meetings where President Xi is looking for a 3rd term. This also delays improvement in global supply chains and creates more transportation bottlenecks.
The stock market started off in 2022 by making new highs but then plunged lower as the market started grappling with the reality of tighter monetary policy. From then, the market traded sideways in a wide range. The S&P 500 traded between 4,100 and 4,500.
The market's breakout attempt in March has now turned into somewhat of a cascade that could potentially turn into a crash. In Monday's trading, the S&P 500 broke below this critical 4,100 level following in the steps of the Nasdaq and Russell 2000 who made new YTD lows last week.
In late-day trading, the stock market staged a powerful rally, turning this breakdown into a potential 'bull trap'. The S&P 500 had an intraday low of 4,062 and ended up closing above 4,100 at 4155.
However, there is no guarantee that this reversal is nothing more than a bounce. These bounces should be expected given that the market is very oversold with the recent Intelligent Investors' Sentiment Survey showing bullishness at 16% which is similar to previous major market bottoms like March 2020.
These shouldn't be chased especially given the market's cloudy outlook. The Fed's hawkish slant means that any good news likely gives the Fed leeway to hike more aggressively. The bad news is unlikely to sway the Fed but hurt earnings. And, it's likely that the Fed wouldn't change its stance until there is a much more significant dent in earnings or the economy.
The market is likely to remain in a downtrend until there is some relief from these circumstances. The worst way to get relief is for losses in the market/economic pain to force the Fed to curtail its hikes even if inflation remains high. The best is for the Fed to be able to go slow due to inflation starting to peak and fall on its own.