Dead Cat Bounce?

This week looks like there may be a little short-term relief from the bears. No guarantees, of course, but the technical set-up suggests there could be a small recovery rally on the SPX as it looks to recover towards the 4170/4207 range. This would be a move of more than four percent – certainly welcome after all the selling of the past month.

It’s too early to tell if this is the base of the move downward (aka buy the dip). In fact, just because the technical setup suggests there may be a brief recovery from here does not mean it will materialize. It simply means the patterns underpinning things suggest it. Markets can still do what they’ll do. And there are plenty of variables that are difficult to factor into this thing.

If there is a good sign out there, it’s that a lot of folks are beginning to suggest the end of the world – or some variant along those lines: S&P 500 falling to 3000 or something like that. Sure, anything’s possible – but is it probable?

When sentiment starts to get to extremes that’s usually a good sign the markets are looking for at least a short-term turnaround. Fundamentally, things actually look better from a pricing perspective than they have in a awhile. PE ratios are much closer to ‘normal’ than we’ve seen in a long time. The real question is, will we see a pull back in earnings or a shift in other variables that will make it even harder on stocks?

It’s possible. But for now, when looking at all the different asset classes out there, stocks look interesting (IMO). Commodities may inflate, but they tend to get hurt in recessions. Real estate already has the headwinds of higher rates. And bonds are contending with higher rates too. That doesn’t leave too many options (outside of cash or derivatives, which both have their dangers as well).

So we’ll continue to watch things unfold. For the week, first-level SPX support looks to be around the 4000 mark. More specifically, the lows last week of 3930/3858 are going to be critical. We break through those, there is probably more pain in store. We hold those support levels, and the 4200-ish bounce looks a lot more probable.

Stay tuned!

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