Two steps forward, and one step back keep traders on their toes

The S&P 500 bounced by more than two percent this week, retracing almost half of the 5% decline we have suffered so far in April. The jury is still out on whether this is only a dead cat bounce or a signal that the downside is over.

It was a week of mixed messages for sure. Good earnings drove markets up on Monday and Tuesday. About 43% of companies listed on the S&P 500 Index have reported so far. Overall, 57% of them are beating estimates. Those that have been beaten are doing so by a median of 8%. There have been stand-out winners and losers among them.

Meta, for example, had good results, but its' future guidance (higher capital expenditures and lower second-quarter sales) disappointed the markets. As most are aware, Meta is one of the most favored Magnificent Seven stocks. Disappointment in Meta caused the NASDAQ and other indexes to fall (one step back).

Thursday night Google and Microsoft reported better-than-expected results and propelled markets higher by one percent or more on Friday (two steps forward). Stocks were buffeted in both directions as traders were forced to reverse positions daily. To say the week was volatile would be an understatement.

This volatility was aided and abetted by macroeconomic data as well. The announcement that the U.S. economy in the first quarter of 2024 grew at its slowest pace in nearly two years, threw investors for a loop. The economy grew at 1.6% over the last three months, which missed the consensus forecast of at least 2.5% growth. That is a big drop considering that in the fourth quarter of 2023, GDP came in at 3.4%. Even worse, inflation, as measured by the core Personal Consumption Expenditures Index, grew by 3.7%, above estimates of 3.4% and a lot higher than the prior quarter's 2%. This was followed by the Fed's favorite inflation indicator, the Personal Consumption Expenditures Index on Friday morning which also came in higher than expected. The combination of lower economic growth and higher inflation immediately triggered talk of stagflation.

I think talk of stagflation is a bit premature at this point but that didn't stop traders from bidding up the price of gold and other commodities. Stagflation is the best possible scenario for pushing the price of gold higher. It is already one of the best-performing assets this year and bulls believe it could go much higher.

The question on my mind is whether this week's gains are simply a counter-trend rally or the end of the recent sell-off. Last week, I advised readers that "The technical charts say that we should expect a counter-trend rally, commonly called a dead-cat bounce. Unfortunately, the probabilities indicate that a bounce will not signal the selling is over."

For those investors that are not aware, "if you drop a dead cat from a high enough building it will surely bounce." I first encountered this saying back in 1985 when both the Singaporean and Malaysian markets were in free fall. These bounces are predictable, and they usually occur on declining volume. That is exactly what happened this week. It usually sucks in the FOMO crowd, who, conditioned to buy every dip, pile in only to get their hands burnt.

I will reserve judgment for now and see how the markets handle next week when we will once again be treated to the next Federal Open Market Committee meeting in mid-week (April 30-May 1)). Until then, hold on to your hats.

Bill Schmick is a founding partner of Onota Partners, Inc., in the Berkshires.  Bill’s forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners, Inc. (OPI).  None of his commentary is or should be considered investment advice.  Direct your inquiries to Bill at 1-413-347-2401 or e-mail him at bill@schmicksretiredinvestor.com .Investments in securities are not insured, protected or guaranteed and may result in loss of income and/or principal.