There Are Signs of a Rebound, But Don't Expect a V-Shaped Recovery
Here's why there is a much greater likelihood of failed bounces now than a straight-up move.
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Early Tuesday morning, there is a little bounce action in the market after a drubbing on Monday. It was some of the worst action since the Covid crisis, with the Nasdaq 100 QQQ and the Nasdaq falling nearly 4% and the Magnificent Seven MAGS crashing 5.1%.
Despite the ugliness, there was one slight positive — the action wasn't totally lopsided. Around 100 stocks were making new 12-month highs, and the advancing volume was around 75%. Energy, biotechnology, dividend-paying stocks, consumer goods, and pharmaceuticals exhibited relative strength.
A complete washout would set the stage for a quick rebound, but the small pockets of relative strength are an indication that there is some buying interest outside of technology stocks that are struggling the most with valuation.
The bullish argument in support of the market is that this is some short-term pain caused by major economic policies that will be very positive in the long term. Tariffs, in particular, are causing problems because of fear that they will be imposed in the long term and have a negative economic impact. President Trump claims that he is just seeking fairness and trying to change the behavior of U.S. trading partners, but the market is unwilling to embrace that argument and foresees negative economic fallout.
The bearish argument is that Trump's economic policies are creating tremendous uncertainty, and there is a strong possibility that they will be ineffective. Some economists are now predicting a recession. Even if Trump's policies eventually work, there will be substantial short-term instability. When that is combined with overvalued technology names and the length of time since the last correction, the market will struggle.
It is difficult to argue that the corrective action is about to end, but some market participants are optimistic that the selling has been extreme enough to produce a good oversold bounce. However, is a V-shaped recovery likely at this point? There was a long period in the last several years where V-shaped bounces became the norm mainly due to the appeal of the Magnificent Seven, but market conditions have shifted, and there is a much greater likelihood of failed bounces now rather than a straight-up move.
Another issue that will come into play this week is the possibility of a government shutdown. The Trump administration is scrambling to avoid a shutdown, which adds to the economic uncertainty and provides another reason for more selling pressure. Any news about the Republicans not having the votes will likely add to the selling pressure.
There is some green on the screens early on Tuesday, but watch to see if Monday's lows hold. That is the only support right now, and it is extremely precarious.
At the time of publication, Rev Shark had no positions in any securities mentioned.
