Market Confusion: What to Watch

Over the weekend, I wrote that the market was so oversold, something big was bound to happen.

Noting the extreme up-then-down volatility late last week, I said...

"Either we see a big rally to get us off these lows - which admittedly seems very unlikely at this point  (but I'll point out that "unlikely" "impossible" "can't happen" are the 3 words mentioned most often at market bottoms)."

Little did I know we'd get that huge rally first thing Monday.

Of course, most of us never had a chance to buy into it - it was one of those deals where you wake up in the morning, and the overnight futures markets are up 3% already, before they even ring the opening bell. Tuesday morning was pretty much the same thing before it faded lower.

So were the last 5 sessions "the bottom"...or at least "a" bottom?

I don't know. I haven't bought anything. But I haven't sold anything either. The big rally of the last few days has barely pushed the needle on the stocks I own. For example, the goodBUYs portfolio still has the same 4 stocks in it as before, still drifting, with only modest exposure to the overall market.

For the Bulls:

On the bullish side of the ledger, Bank of America - which has been surveying fund managers for decades to get their monthly opinions about the markets - says their survey group reported having its highest cash positions - and lowest overall equity exposure - in 21 years.

Fund managers like to stay fully invested. So when cash and "not investing" is a preferred option, you know things are perhaps so bad out there that they just have to get better.

For the Bears:

On the other hand, Monday and Tuesday's rallies fit the typical "bear market rally" mold. They opened big and strong, and practically shouted "Get in and buy now, because this train is leaving the station!"

All the better to set up the "rug pull" that perhaps comes later.

By comparison, bull market trading sessions often feature lots of weakness early in the trading session, only to finish unchanged or higher. The opening bell rings and the market sells down a percentage point or two because of the worry du jour - whatever's the latest fear, worry or excuse not to own stocks.

Keep Your Eye on ARKK

The major indexes tend to see lots of intraday volatility as various big companies report their earnings. On Monday, it was the banking stocks. Here on Wednesday, it's Netflix.

That can make it hard to see the main trend for stocks overall.

So as I've noted in recent posts, I'll continue to keep my eye on Cathy Wood's ARK Innovation (ARKK) fund for where the trend might be taking us - higher or lower.

Could the "trap door" scenario I've sketched out previously...still be in play? Perhaps. The rallies from Monday and Tuesday look a lot less impressive with ARKK, compared to the major indexes.

Since September 30, the S&P 500 and Nasdaq 100 indexes are 1.5% to 3.5% higher, while ARKK is down 5%:

Basically, I'm operating under the theory that for the overall market to turn around in a substantial way...we need to see ARKK stop going down.

As an ETF, it represents companies with huge potential - but in the current market environment, they're also the weakest, most speculative, worst-performing, and most unprofitable.

So when we see ARKK's chart start to show some "pep"...we'll know that the probabilities are starting to build for a real rally.

It could all change in a day or two. But right now, I just don't see it.

Jeff Yastine