Stay Highly Reactive as the Market Decides on Its Next Move

After some Fed-induced struggles, stocks bounced back a bit on Thursday morning and are perking up to start the day on Friday. Pressure had picked up this week due to worries about quantitative tightening, and that caused selloffs in growth stocks, technology, and some of the high-beta names. Healthcare, defensive stocks, biotechnology, and a mix of other groups produced some relative strength.

Pundits are very mixed in their view of the market. The bears have a very compelling narrative as there is a long list of negatives, including war, inflation, a hawkish Fed, and the potential for a recession. The softness this week also provided a better technical argument for continued downside.

The bull’s argument is that this market is very aware of the many negatives and is working to fully discount them. Inflation and a hawkish Fed are nothing new and are being well-anticipated by the market. Technically, the big trend bounce off the mid-March lows is still intact, and the S&P 500 is over the 50-day simple moving average.

The action this week has been marked by some very strong rotational action. Growth stocks, financials, and bonds were hit hard on Tuesday and Wednesday, but beneath the surface there was some speculative trading and relative strength in various sectors. It was not as negative as it was in early March.

I am actively avoiding the temptation to guess where the indexes are heading next and am staying very focused on the price action. It’s easy to make a compelling bearish case, but because it’s so easy, it’s less likely to work.

My game plan is to manage positions tightly and not be in a big rush to put cash to work. As I outlined yesterday, I have a long shopping list, but I am not seeing great entry points yet.

Stay flexible and open-minded about this market, it could easily break in either direction, and the key to success is to react as conditions develop.

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