A Significant Market Top or a Pause That Refreshes?
Bears believe a major top is forming, but bulls are looking for a bubbly rip higher to end the year.
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In the last six trading sessions, the market was hit with elevated volatility and the most severe corrective action since the tariff tantrum in April. All of the major indexes are still above their 50-day simple moving averages, but some leading stocks were hit hard, and speculative action in secondary stocks turned negative.
This corrective action is not a big surprise. The bears have been anticipating it for months as they warned about stretched valuations, a slowing employment market, the impact of tariff wars, bubbly action in AI names, and a host of other issues. What the bears didn’t see coming, though, were loan problems at regional banks, which tripped up the market this past week.
Technically, the market had become overheated, and a pullback was needed and healthy. The question now is whether it will go deeper or was this a sufficient pause that will help create conditions for a continuation of the uptrend.
The reaction to earnings reports in the next two weeks will help to answer that question, but there is also upcoming trade negotiations with China, the continued government shutdown, the likelihood of a Fed interest rate cut, and positive seasonality in November and December.
The bearish thesis is that stocks are too expensive and the economy too weak to keep things running higher. However, there is a cohort of bulls that foresee another significant leg higher once the current correction action comes to an end.
The bullish thesis is that continued AI strength, a dovish Fed, and economic growth will provide support and create fear of missing out. There are parallels to the 1999-2000 period when the market went parabolic due to a wave of liquidity created by Y2K fears and fueled by excitement about the new internet liquidity.
The market has plenty of liquidity as the Fed is set to cut rates at least several more times, and there are many strategists who believe that AI is still relatively early in its growth cycle. If the indexes regain their footing, it will not be hard for FOMO to take hold and suck in the skeptics who are worried about a market top.
In the shorter term, watch for elevated volatility, although that will be beneficial for aggressive short-term trading. We have bounce action early on Monday morning with groups such as data centers recovering.
At the time of publication, Rev Shark had no positions in any securities mentioned.
