After Wednesday’s Bloodbath, a Battle Is Brewing in the Market

After the pounding on Wednesday, we have a battle this morning: traders looking for an oversold bounce vs. stuck investors looking for exits.

We saw a couple of small spikes this morning, but they were quickly overwhelmed by the very short-term flippers and long-term investors trying to reposition.

Breadth is running around even, but notable once again is the number of new 12-month lows has stayed fairly low at around 500. Apple (AAPL) is showing some relative weakness, but generally, we have some basing action. As long as the new lows do not expand, I am looking for some outperformance in small caps and secondary stocks.

We’ve also been hearing a lot of talk lately about the potential for a recession. Some people like Tesla (TSLA) boss Elon Musk say we are already in a recession, while others say it will not occur for many months or years.

Both sides may be correct. The problem is that the definition of a recession is murky. The technical definition states a recession comes after two-quarters of declining growth. Currently, we have one-quarter of negative growth, but expectations for the second quarter are positive. If that is the case, then there could not be a technical recession until at least January 2023.

The more practical view of recession is that growth is already slow and that if the trend continues, then we will certainly meet the definition of a recession. The catch is that by the time the economists make that declaration, the pain of the event may already be over.

The important issue is whether there is a recession according to some arbitrary definition, but whether growth is slowing and likely to continue to slow. The retail sales news on Wednesday raised real concerns about slowing growth, and that is why the market is acting so poorly.

It is interesting to note that bonds rose Wednesday and are Thursday, too. Bonds are viewed as a safe haven in recessions, and this suggests that inflation fears could cool off quickly if growth slows as abruptly as some think it will. Recessions will help to kill inflation, but this medicine may be painful.

I’m doing very little while I await better chart development. It is very easy to be anxious about trying to buy the market at the perfect time. I try not to be sucked into that game and remind myself over and over to wait for better price action rather than worry about precise timing.

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