If anything, the market's recent response to positive news reflects a new sentiment shift. A few months ago, economic reports were getting spun positively. Good GDP or employment data meant the economy was expanding; bad data implied that the Fed could stay accommodative and measured for a longer time. That sentiment is now shifting.
Bad data mean the economy is weak, while strong data will only hasten the eventual 50-basis point hike. For further clarification of this sentiment shift, I expect the market reaction to Friday's employment report to be revealing. Is good news bad, or is good news good? We'll find out soon enough.
Lastly, look at what's been occurring in the dollar, gold and oil. The countertrend rallies in these areas are of a short-term, corrective nature. They can run long enough to sucker in traders, but once they resume their prior trends -- dollar down, oil and gold up -- many players will get caught leaning the wrong way. They will be desperate to stop the pain and that will exacerbate the selling in equities.
Plan the Painful PathSo far, the high for the first half of the year was put into place on March 7, with the S&P 500 closing at 1229, and the Dow at 10,984. I suspect that we will not be able to power through those levels, a good 5% higher from yesterday's close. I further suspect a lot of people have been watching those numbers. If we fail there (or lower), here's how I see a likely scenario playing out.
The market won't simply collapse. That would be way too easy. Rather, we could get sandpapered to death, sliding a few days in a row, then rallying a day, on and on until the summer.