The market benefited from a positive follow-up on Tuesday as the indices jumped higher on a very good scale. The volume wasn’t large and the move wasn’t as strong as what happened last Friday, but it was good enough to cause Investor’s Business Daily to raise its market outlook to “uptrend confirmed”.
A confirmed uptrend doesn’t mean we can be sure the bear market is over, but it gives the bulls the short-term edge again. There are now obvious support levels, and if they hold, we should see a bullish chart development.
While the index price action looks favourable, there is terrible action in the retail sector. Walmart (WMT) suffered an 11% loss on Tuesday after reporting disappointing first-quarter earnings and guidance, and here Wednesday morning Target (TGT) was down more than 20% in premarket stock as that first-quarter earnings fell. Both companies had the same problem: inflation squeezes margins and may hurt demand in the future. Revenues aren’t bad because inflation drives prices up, but retailers can’t raise prices fast enough to protect margins.
The market wasn’t worried about that on Tuesday, as tech stocks that have already been hardest hit fueled strength. Higher interest rates were also ignored, indicating that market participants are hoping the worst has already been priced into the market for the most depressed stocks.
Although there has been some encouraging technical action over the past week, I am in no rush to put my money to work. The macro environment is still full of landmines, and this news from the retail sector clearly hints at the potential for a recession. The market isn’t currently pricing in the likelihood of a recession, but this retail news will get you thinking.
I am a selective buyer, but mainly focus on chart development rather than fundamentals and valuation. I have a long list of stocks that I like based on fundamentals, but, as we’ve seen, that’s little protection in a bear market. It’s the price action that’s key, and it’s improving but still isn’t good enough to prove that the bear market correction is over.
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