The Market Will Bottom When Investors Scoff at the Idea of a Rally

Trader Bear Market NYSE

The news feels terrible lately, doesn’t it?

There’s high gas prices. There’s a war in the Middle East. There are long lines at the airport. The stock market is slumping. The bond market is slumping.

Software stocks have been clobbered. The Mag 7 barely exist anymore because so many have been taken down. Financials seemingly have a new story about how bad private credit is daily. House sales are slow, too.

I keep waiting for the Wall Street strategists to lower their year-end S&P targets, because that is often one of the last ‘give-ups’ we see. Yet they refuse to do so.

We’ve seen them pare back their estimates for GDP. We’ve seen them reduce the number of rate cuts they were looking for. We’ve seen them lower their employment numbers and hike their inflation numbers. We’ve even seen them chat up stagflation. Yet somehow, some way, they seem to think the S&P will still crank its way upward to the tune of 10-15% this year. I would like to see that change.

The weird thing about Monday’s oversold rally was that I think Tom Lee was about the only one who was bullish. Yes, I know Tom is a perma-bull, so that is to be expected, but often when the market finally rallies from an oversold condition, you see others talking up the market. Yet that wasn’t the case.

Almost every guest I saw on television scoffed at the rally. Perhaps it was because it gave back so much of the early gains. Or perhaps they don’t feel as though the news was much better than it was on Friday. I would say ultimately that is a plus for the market.

You don’t want folks to embrace the rally yet; you want them to scoff at it. That is how you get sentiment to an extreme so that when (if) we do come back down, we can do so with extremes. Extremes are helpful.

As for the rally, it was pretty pathetic. It wasn’t good enough to move any of the indicators except the Overbought/Oversold Oscillator, which edged upward yet again.

What we did see, though, was the Russell 2000 outperform. Recall, a week ago, I showed you the long string of high put/call ratios for the Russell 2000, so it makes sense that there were more shorts to be covered than elsewhere. I continue to see that unwind that way.

Away from that, it would be good if we saw the market pullback for a day or two because I suspect we’d then rally again. What you don’t want to see is a big giant chop where we use up the short-term oversold condition by churning sideways. That won’t get anyone bullish.