The market has become increasingly overheated recently and may have hit a short-term peak on Tuesday. The advance from June lows accelerated and the S&P 500 remained in positive territory for five straight days as it hit its 200-day simple moving average.
Much of this progress has been a function of skepticism about the macroeconomic environment and poor positioning. Market participants were simply not prepared for this kind of move, and it fed on itself as it continued. The more doubt there was about the move, the harder it was for investors to keep pace.
The bullish narrative that has evolved as strength has developed is that inflation has peaked and strong employment indicates that the economy may remain strong enough to avoid a recession even if the Fed continues to raise rates. It’s a Goldilocks scenario with the Fed doing exactly what is needed to keep things on track.
On Tuesday, strong profits in the retail sector helped the market rebound after a slow start in the morning. The recent trend has been some hesitation at the start, which attracts bearish buyers, and then stronger bullish momentum as the day progresses. The action was coming in downright frothy by midday when a major sell-off hit, and there was a sharp reversal. This happened right next to the 200-day simple moving average of the S&P 500, which may have triggered the algorithms.
Another recent development has been a big leap in targeted short compressions. At the peak in 2021, meme actions and short-term actions were signals that market action had become excessive. This strong speculative action may continue for some time, and there is no way of knowing when it will end, but on Tuesday there was a long list of stocks with significant short positions that moved very strongly. . Early this morning, Bed Bath & Beyond (BBBY) is up around 15% as traders continue to press it higher.
Strong markets tend to remain sticky on the upside, but Tuesday’s intraday reversal may have dampened momentum and will allow some consolidations and pullbacks to develop. Even the bulls want this market to rest, but it will likely remain a tricky trading environment.
I have been selling steadily in recent strength and have around 75% money to start the day. My game plan is to keep watching for new buy points to be developed. The graphics are mostly stretched out, and I’ll have to wait for them to snap back into place.
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