Two key market barometers to track are interest rates and energy prices, as both are driving further corrective action, says James “Rev Shark” Deporre.
“One bull trap is a spike in energy prices combined with higher interest rates and inflation, which are causing concern,” Deporre wrote recently on Real Money. “Big cap technology stocks like the FATMAAN names tend to be more sensitive to interest rates, and that is where the brunt of the damage is occurring.”
The market has experienced “periodic spikes” during recent trading sessions, as investors jump in and out of the market. That’s not helping right now.
“The process of failed bounces is what eventually creates the dismay and disgust that leads to a market bottom,” Rev Shark noted in Real Money. “Negative seasonality still continues for a while, but in about two weeks, there will be some third-quarter earnings news that will help to shift the market narrative.”
As Rev Shark has often said, bad markets don't scare you out, they wear you out. “Bottoms are formed when market players grow tired of the miserable action and don't want anything to do with stocks,” he said. “That process has been ongoing for months in small-caps, but big-caps still have some selling to do to reach a good level of disgust.”
Another area that needs to be monitored is sector flow.
“Parts of the market have already corrected much deeper than others,” Deporre added. “Are the small-caps and secondary stocks showing signs of relative strength, and are they building support levels? Typically when the indices are hit hard, small-caps suffer from a lack of bids, but we need to watch to see what the intensity of the selling looks like.”