Stocks Manage Mixed Recovery, Chance for Further Correction Is High

Stocks rebounded from worries about bad debt in the financial sector on Friday, but it was a mixed recovery with only 44% of stocks in positive territory as the Russell 2000 (IWM)  lagged. Investors returned to their favorite Magnificent Seven (MAGS)  stocks and the less economically sensitive technology names.

Recent high flyers in data centers, rare earth and quantum computing were under pressure. These groups were the most technically extended and most expensive, so it isn’t too surprising that there was caution after the technical damage that had been done. Thinner and less liquid stocks also did poorly, while the big liquid technology names were favored.

Next week, earnings season gains momentum, and we will start seeing reports from sectors outside of banking. The Magnificent Seven reports aren’t until the following week, but Tesla (TSLA) , Netflix (NFLX)  and IBM (IBM)  will generate some interest.

The market was due for a shakeup, but the source of the reaction was a surprise. There has been a lot of speculation about what might trigger corrective action, and bad loans in the banking sector were not one of them.

Bears remain focused on a slowing economy, sticky inflation, tariffs and high valuations, but these issues are not gaining much traction. That could easily change, and the reaction to earnings reports will provide some insight into how sentiment is developing.

The good news is that many stocks need pullbacks to help in the development of better charts. When stocks go parabolic, like many did in the last couple of weeks, it is great for holders but not so great for new buyers. Stocks may not come roaring back immediately, but if they find some support, that will be a positive development that sets the stage for the traditional end-of-the-year rally.

Have a good evening. I’ll see you on Monday.

At the time of publication, DePorre had no positions in any securities mentioned.