After small-cap stocks ( (IWM) ETF) were pounded for two days, market participants were nervous Thursday morning and in a rush to bottom fish. The indices opened lower, attempted to bounce, and failed, but the second bounce attempt held, and once the early highs were exceeded, some momentum began to build. Following limited pressure caused by margin selling, the buying picked up nicely in the afternoon and stocks closed at the highs.
Breadth finished at around 2 to 1 positive, but only 60 stocks were hitting new 12-month highs, while over 330 suffered a fresh 12-month low before the turn finally occurred.
These sorts of snapback rallies after the intense selling we have had recently are not unusual. The best bounces always occur in the worst markets, but the question now is to what degree can we trust it.
In the "old" days, traders would be very hesitant to trust this sort of bounce after the technical damage that we have suffered lately, but that has changed in recent years. For many reasons, there is a much greater tendency toward V-shaped bounces than there used to be. It is likely self-fulfilling to some degree since they have become more common, but it is dangerous these days to underestimate the power of V-shaped bounces.
We still have several days before the quarter comes to an end, but it looks like a significant amount of rotation and repositioning have already been done. The ugly action of the last few days was not driven by any one news headline. It was most likely the product of big funds repositioning in preparation for the economic shift occurring as the economy reopens.
It has been very chaotic action, but the good news is that we have an opportunity now to sort through the wreckage and find some opportunities. There are quite a few, but don't be too confident that the worst is over.
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