The market rallied very nicely for five days before pulling back on Friday, but it makes for a very difficult technical setup as we head into some very significant news flow.
There are three major events occurring this week.
The first is earnings reports from the most important technology companies in the market. Apple (AAPL) , Amazon (AMZN) , and Microsoft (MSFT) are on deck, along with quite a few other notable names. So far this earnings season, the reports have not been great, but the response has been good. Expectations have been low, but Snap (SNAP) was a disappointment on Friday and raised some doubts about the health of technology in general.
The second event is that the Fed is widely anticipated to raise rates by 0.75% on Wednesday. After the hot CPI report, there was speculation that they may go a full 1%, but they quashed that debate, and that helped to trigger the recent market rally.
The third event is that GDP is announced on Thursday and is likely to be negative. That means there will be two quarters of negative growth, which is the technical definition of a recession that some economists use, but the White House put out a press release to argue that it really isn’t a value definition. They obviously see what is coming and are anxious to get in front of the blaring headlines about how we are now officially in a recession.
The market run-up over the past week creates a “sell the news” dynamic, but there is a very intense debate right now over whether this is just a bear market bounce or a significant turning point. The bull’s argument is that the market is pricing in both inflation and a recession and that there aren’t many sellers left. So far, the charts are holding up, and there is no surge in new lows or retests of support, but, as we saw on Friday, the mood can shift very ugly.
The bears argue that this is a standard bear market bounce. We still have a hawkish Fed that is draining liquidity, we are heading into the worst time of the year seasonally, and the economic uncertainty is too great to effectively discount it.
At the moment, the bulls have an advantage, but the news flow this week is going to determine where things are heading. My game plan is to continue to maintain high cash levels, be selective with stock-picking, and manage positions tightly. I see no reason at this point to be overly optimistic.