The market did an exceptional job on Wednesday of making everyone feel a little foolish. Both bulls and bears were on the wrong side of the action, and when all was said and done, the market was close to unchanged.
The moves in Microsoft (MSFT) were a great illustration of the kind of action we’re seeing. After gapping up around 4% on Tuesday night when earnings were released, the stock totally reversed and was down 4% following the conference call — and by the open on Wednesday morning. The stock recovered all day long and ended the day close to unchanged from where it was before earnings were announced.
The overall market followed a similar trajectory and recovered from steep early losses to close nearly flat on breadth of around 3800 gainers to 4300.
Based on the close, it looked like very benign action, but there actually was a furious battle taking place. On one side are bears that are convinced that earnings and guidance are slowing and are foreshadowing a recession. Several prominent strategists believe the market has yet to fully price in the earnings slowdown.
On the other side are market players trying to anticipate a sustained market recovery. There are underinvested or even short in some cases. They want to put that idle capital to work and are jumping on pullbacks, as we had on Wednesday morning. There is even talk that Microsoft used some of its large cash holdings to buy back shares. These buyers are far more worried about missing out on good bargains than they are worried about being stuck in another leg down.
It is a battle between fundamental bears on one side — who are anticipating poor earnings — and bulls on the other, with too much idle cash and who don’t want to miss out on buying opportunities. The bulls have the buying power, and they are preventing the bears from gaining any traction, even though there really are some notable fundamental problems.
The battle is going to intensify as more earnings reports hit. Tesla (TSLA) is coming up tonight, and next week we have reports from tech heavyweights like Apple (AAPL) , Amazon (AMZN) , and Alphabet (GOOGL) .
It is unlikely that these reports are going to be blowouts, but Microsoft was able to shrug off comments by the CEO that 2023 was going to be a dead year.
Bears are convinced that fundamentals and valuations favor their position, but in the short-term, they are fighting some very bullish price action.
Have a good evening. I’ll see you tomorrow.