Buyers Follow Through, But the Real Test Lies Ahead

U.S. Stocks and Markets

After the big leap on Tuesday, we have some follow-through action on Wednesday morning. Breadth is running about 60% positive and the Russell 2000 (IWM) is leading. The small-cap leadership is primarily a function of increased interest in individual stock picking, which I discussed in my opening column.

I want to reiterate that it is premature to declare a market bottom. At this point, all we have is a good counter-trend bounce, and that can be more sizable than the bears foresee.

For a convincing change of trend, we will need to consolidate and then have a strong follow-through day next week. We can afford to give back some gains, but the recent lows cannot be tested.

What to Make of Tonight's Address

The big risk is that developments in Iran undermine hopes of a quick end to the situation and a normalization of oil prices. Oil is down about 3% Wednesday, but remains sticky to the upside. Bonds are also lower, which indicates that worries about inflation have not suddenly disappeared.

There is significant speculation about what President Trump will say when he addresses the nation at 9 p.m. ET tonight. It will be his first prime-time address since the war began on February 28.

The optimistic hope is that he is preparing to declare victory and announce a withdrawal timeline. The more cautious reading is that the speech could be a cover for something more aggressive. There are reports that the Defense Department has been preparing options for limited ground operations in Iran, potentially involving thousands of troops over the course of weeks or months, though Trump has not yet greenlit any of those plans.

Trump also said Wednesday that Iran has asked the U.S. for a ceasefire and that he will only consider it after the Strait of Hormuz is reopened. Iran's Revolutionary Guard responded that the Strait was "fully" under its control. That exchange alone illustrates how far apart the two sides remain despite the market's optimism. I have no idea what tonight will bring, but I'm highly confident we are going to have significant volatility as events unfold.

How I'm Positioning

With that in mind, I've made quite a few partial sales Wednesday and cleaned out some positions that were not working. I wanted to raise cash levels and create more flexibility for shorter-term trades. I still have a long list of stocks I want to add as the charts develop, but they are likely to see increased volatility as more news about Iran and oil crosses the tape.

A good example of how I'm approaching individual names is Hims & Hers Health (HIMS) , which I discussed Tuesday. I made my first small buy around $19.50. I haven't sold but would have trimmed this morning if I had a larger position.

My goal now is to wait for a second, third, and fourth entry point. As my position grows, I'll be more inclined to take some quick partial profits along the way.

I manage dozens of other positions in a variety of ways. My short-term trading activity will increase as I watch for either a failed bounce or a confirmed trend change. We are going to have some strong reactions to headline news so stay vigilant and be ready to move.

At the time of publication, Rev Shark was long HIMS.