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Market Extra: Why are stocks falling? Fragile ‘bear market’ bounce gives way to stagflation jitters

Is that all there is?

U.S. stocks were back on the downswing in a big way Wednesday, underlining warnings from some market veterans that sharp rebounds in what has so far been a down year for equities may be little more than the sort of volatile, short-lived upside rebounds characteristic of bear markets.

“It’s never wise to make too much of a bounce which has not achieved significant technical progress, particularly when no real capitulation has occurred, despite ongoing bearishness,” said Mark Newton, head of technical strategy at Fundstrat, in a Tuesday note.

The Dow Jones Industrial Average

dropped 740 points, or 2.3%, while the S&P 500

shed 2.8% to trade near 3,980 and the Nasdaq Composite

dropped 3%. That comes after the Dow jumped more than 400 points on Tuesday, while the S&P 500 advanced 2% and the Nasdaq rallied 2.8%.

Equities last week tumbled sharply last week with the S&P 500 coming within a whisker of entering bear market territory —- a drop of 20% from a recent peak —- before bouncing on Friday. A close below 3,837. 25 would mark a 20% drop from the large-cap benchmark’s Jan. 3 record finish.

See: Despite bounce, S&P 500 hovers close to bear market. Here’s the number that counts

Some technical analysts were wary of calling a near-term bottom as the selloff in equities, while steep, had remained largely orderly. A failure by the Cboe Volatility Index
sometimes referred to as Wall Street’s fear gauge, to push above the mid-30 range was seen as a sign that investors hadn’t made the sort of “capitulation” that often clears the way for a sustained rebound.

However, some positive market internals on the upside during Friday’s and Tuesday’s bounce have some analysts looking for some near-term upside, which could continue to confound market bears.

Upside volume on Russell 3000

constituents came in Tuesday at 88% —- just shy of the bullish 90% threshold, said Jeff deGraaf, founder of Renaissance Macro Research, in a note.

The 10‐day figure, meanwhile, has become overbought, deGraaf said, but noted that tends to be “a bullish thrust signal” three months forward, and better than the three-week forward signal (see chart below).

Renaissance Macro Research

Wednesday’s weakness came as investors, who had brushed off severely disappointing results from Walmart Inc.

a day earlier, were rattled as rival Target Corp.

also revealed that it also saw its margins take a hit from rising labor and fuel costs. Target shares dropped more than 25%, leading losses across the retail sector.

Read: Target stock plunges as profit drops on consumer spending shifts and jump in freight costs

What was particularly troubling was that Target was supposed to be shielded from a sharp rise by the U.S. dollar versus major rivals because it’s a domestic-only retailer, noted Louis Navellier, founder of Navellier & Associates, in a note.

Remarks on Tuesday by Jerome Powell, read as a hawkish affirmation of the central bank’s resolve to tighten policy until inflation convincingly falls even if it causes economic pain, were also cited as a factor, he noted.

“More than ever, evidence of peak inflation may be needed for a sustained market recovery,” Navellier wrote.

See also: Stock investors are now starting to feel the 5 stages of bear-market grief

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