For a quick and simplified way to measure underlying market sentiment you can look at the long term trend of the individual Dow stocks, where 26 of the 30 stocks are still in long term uptrends. The first event was of course the headline grabbing rise in long term rates to a one year high. Rates are now at a level where stocks with excessive valuation levels will increasingly see selling pressure. The third event yesterday, and perhaps the most serious, was the announcement by a Japanese official that tomorrow's Japanese GDP numbers are expected to show positive first quarter growth, breaking a string of 6 down quarters. While the chances of a Fed rate hike have increased, Friday's PPI and Retail Sales numbers, and next week's CPI could quickly negate yesterday's damage.
Caution remains the key ahead of the upcoming economic data.
A case could be made that the past few weeks were merely a bad case of Fed induced indigestion and that the patient has now fully recovered, ready to participate in the next chapter of the Goldilocks saga. There is another explanation for the market's bounce however, one that is not conducive to the start of a sustainable rally, namely, the market's rally has been primarily due to A Paucity Of Sellers. The nature of the recent rally, with volume doing a swift disappearing act as the sellers await further economic data, points to a short lived rally with heartbreak the end result for those who have eagerly returned to pick up perceived bargains in their favorite speculative hunting grounds. The reemergence of the large cap techs and Internet stocks as market leaders points to market weakness rather than strength. A market that is led by those who have yet to learn that there is a strong inverse relationship between valuation levels and interest rates is a market that is swiftly marching to the edge of a cliff without a parachute.