Don't Mistake a Bounce for a Market Bottom
Counter-trend rallies in difficult markets can persist longer than expected, but stay skeptical and don’t let FOMO drive your actions.
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After two days of sharp selling and weak intraday recoveries, stock futures are moving higher early Wednesday morning. There is a slight aroma of relief in the air, but it is tinged with questionable hope and optimism.
The primary catalyst for the better action is a New York Times report that Iranian operatives used backchannels to contact the CIA a day after the U.S.-Israeli strikes began. The market interpreted that as a sign that an off-ramp may exist. S&P 500 futures turned positive after falling nearly 1% overnight. European stocks advanced 1.2%. Bitcoin jumped to nearly $72,000, suggesting some risk appetite is returning. Brent crude pulled back from its intraday highs to trade near $83 a barrel.
A counter-trend bounce isn't a big surprise after the recent ugliness. These rallies in difficult markets are often stronger and longer than expected because investors are running on emotions as they deal with widespread uncertainty. Aggressive traders love counter-trend bounces and that causes confidence to build and volume to pick up. However, the most important issue is that it is still just a bounce at this point and should not be regarded as a meaningful market low.
Don't Trust the Headlines
The New York Times report about a backchannel connection is thin gruel for a major bounce, but after the recent market carnage investors are anxious to seize on something positive. It is unlikely that the Iran situation is suddenly going to quickly clarify at this point.
President Trump has made regime change an explicit objective and has said the bombing will continue as long as necessary. That is not a position that is likely to lead to quick resolution. There are sure to be many more dramatic developments in the days ahead.
Rapid market movements and higher volatility will continue in large part because energy and many goods supply chains are a mess. Uncertainty about the economy is extremely high and that is the biggest obstacle right now.
It is very important to recognize that V-shaped recoveries are technically suspect. Trapped longs and aggressive shorts are both prone to sell into resistance levels as they are hit. There has been a greater inclination toward these sharp bounces in recent years, which is likely due to how algorithmic trading is programmed. These bounces can easily run further than the fundamentals justify. Play the bounce if you are inclined but keep it short term and stay disciplined about your exit.
The News Flow Will Keep Things Unstable
The underlying issues that drove the selling have not changed. Brent crude is still near $83 a barrel and oil is up roughly 15% on the week. The Strait of Hormuz remains at a virtual standstill.
QatarEnergy halted liquefied natural gas production after an Iranian strike on its Ras Laffan facility. Trump announced insurance guarantees for Gulf shipping and proposed Navy escorts for tankers through the strait, which helped stabilize oil somewhat, but these are short-term measures addressing a problem with no short-term solution.
The most dramatic illustration of what sustained conflict means for global markets played out on South Korea's trading floors on Wednesday. The Kospi suffered its biggest selloff in history, with Samsung Electronics, SK Hynix, and Hyundai Motor all dropping sharply. The South Korean government announced it would actively deploy its market stabilization program.
South Korea's situation is the result of a double hit: energy vulnerability from oil and gas disruptions and chip demand uncertainty amid the broader AI selloff spreading globally. Korea has recently been the world's hottest market, so the fact that it just had its worst day ever is a solid reminder that the market still has a long way to go before it can be trusted.
The Inflation Threat Is the Story Behind the Story
The main issue investors will have to watch in the weeks ahead is inflation. A war that lasts four weeks does not mean four weeks of elevated oil prices. Supply chain disruptions, shipping issues, and LNG production halts take considerably longer to unwind than the headlines that caused them.
The 10-year Treasury yield has risen for three consecutive sessions, now sitting at 4.08%, even as stocks have been under pressure. Bonds selling off alongside stocks is the market's clearest signal that inflation is the primary concern, not economic growth.
Mohamed El-Erian warned this week of stagflation gripping the global economy the longer the conflict continues. Jamie Dimon called inflation the skunk at the party. The Fed was already in a difficult position before this conflict began with core inflation proving stubborn and last Friday's PPI data running hot. A sustained energy price spike on top of that existing pressure makes the path to rate cuts considerably narrower.
What to Watch Today
Beneath the surface, the technical damage from Tuesday is worth understanding. The Nasdaq came close to testing both its 200-day moving average and the 22,000 level before buyers stepped in. Breadth was more than 6-to-1 negative early in the session, improving to just over 3-to-1 negative by the close.
Volume rose from Monday, giving the Nasdaq another distribution day. Data storage names like Seagate Technology (STX) were hit hard and there is still great instability in technology. Fiber optic infrastructure demand has stayed strong and a report later from Broadcom (AVGO) will be important.
Game Plan
This is still a market where patience and capital preservation are the primary objectives. The dip buyers who stepped in Monday and Tuesday have had a difficult experience and that will make the next group of buyers more cautious.
Play the bounce if you are so inclined, but keep positions small, stay short-term, and be ready to exit quickly. Do not mistake a strong morning for a significant market low. We are not there yet and the news flow between now and any genuine resolution will keep things unstable.
The investors who will benefit most from this period are the ones doing the quiet work of identifying what they want to own when conditions stabilize and waiting for a genuine change in market character before committing meaningful capital. That change will come. It always does.
At the time of publication, Rev Shark had no positions in any securities mentioned.
