Will the Market Make a V-Shaped Recovery or Is This a Trap?
V-shaped bounces have become more common in recent years, but investors who want to believe the worst is over could be trapped.
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Last week, the senior indices covered up significant weakness in high PE growth stocks. On Monday, the indices covered up some action again, but this time it was strength in many of the same high PE growth stocks.
The IBD 50 Fund ETF (FFTY) jumped 4.5% and the Magnificent Seven was up 1.2%.
Some investors were concerned that the big oversold bounce on Friday would be short-lived, as trapped longs used the strength to reduce their positions. However, after a little hesitation on Monday, there were signs of FOMO that helped to keep stocks running most of the day.
Evolution of the Bounce
The question now is whether this is a V-shaped recovery or a trap for investors who want to believe the worst is over.
Over the last few years, V-shaped bounces have become more common. The conventional wisdom is that trapped longs will sell the initial bounce after a pullback, but that has occurred far less often than it used to. This is probably due to a shift in the way computer algorithms approach the action. There is also a greater inclination toward FOMO because there have been few long-lasting corrections since the COVID bear market.
Sorting Out the Tech Rotation
The market appears to have digested the rotational action in the AI sector and volatility is now slowing a little. There were strong bounces in Meta (META) , Nvidia (NVDA) , Microsoft (MSFT) , Palantir (PLTR) and Oracle (ORCL) . Data centers also caught a bid, adding to TeraWulf's (WULF) strength.
The Game Plan
Overall, the price action is healthy, and the fear of more downside is slowly evaporating. We have a small-cap earnings season heating up soon, and I will be focused on several individual stocks reporting. We also have some economic reports coming up that could generate a reaction. For now, the focus is on managing positions and looking for high-probability setups as the market stabilizes.
Have a good evening. I'll see you tomorrow.
At the time of publication, DePorre was long WULF and META.
