Indications of a Market Bottom Are Building

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Worries about inflation and interest rates have been helping to drive a market correction over the last six weeks. On Wednesday, the CPI report confirmed that inflation is running hot, but that news may have helped to create some good support.

The initial reaction to the CPI report was mixed, and the market dipped a bit, but buyers started to step up as the day progressed. After the minutes of the last FOMC meeting were posted, confidence continued to build. One of the key factors in the better action was that bonds rallied on the news as interest rates dropped. The bond market didn’t share the view of equity bears that believe that rates are going higher and will kill the market.

What was most notable about the market action on Wednesday was that speculative stock-picking picked up, and the buyers appeared to be more confident. The strength was primarily driven by high P/E, growth stocks that typically struggle when interest rates are rising. These stocks are more sensitive to rates because their major earnings are far in the future and have to be discounted to present value to arrive at the current valuation.

That worry was set aside, and there were sharp jumps in some of the most expensive growth names in the market Datadog (DDOG) , TaskUs (TASK) , Cloudflare (NET) , and others attracted interest and, for a change, the indices ended the day with some positive action. There has been a pattern of late-day selloffs, but that shifted yesterday.

In addition to the relative strength in growth stocks, there was also a surge in speculative trading in certain secondary names. Retail traders were acting much more confident as they focused on some de-SPAC names such as IonQ (IONQ) and Redwire (RDW) . Cryptocurrencies and miners like Hut 8 Mining (HUT) also attracted aggressive money.

The action had a different and positive feel to it, but now the important issue is that buyers build on the strength. As I discussed Wednesday, one of the missing ingredients lately is “fear of missing out” or FOMO. There hasn’t been any big concern that this market is going to take off to the upside and make it hard to put money to work. If there is further strength and more gains, then some folks will start to worry that they missed buying the bottom and will be more aggressive at putting cash into favored names.

Another important issue is that we are now moving into earnings season, and that means that the focus is shifting more to individual stocks and away from some of the macro issues that have been driving the correction since September. A few good reports and positive reactions are going to help build up bullish sentiment.

It is still a little premature to be too bullish, but conditions are improving nicely. If bulls can keep pushing Thursday, positive momentum will build.