The news feed is bearish, but the price action is bullish

The best test of a market is how it handles negative news. If stocks are holding up when the headlines are full of doom and gloom, it suggests the worst may have already been priced in the market.

The current news environment is one of the worst since 2008-09, but equities have been handling it fairly well since bottoming out on May 20. Gasoline and oil prices are soaring, bond yields continue to rise, inflation shows few signs of slowing, the war in Ukraine is not easing, fears of a recession are growing and almost everyone calls it a bear market, although the S&P 500 still hasn’t met the technical definition of a bear market.

The trillion-dollar question is whether stocks can continue to hold as the world grapples with an unprecedented number of negatives.

The bullish argument is that this long list of negatives is very well known at this point. Everyone is painfully aware that the average gas price is hitting $5 in the United States and there are no signs of it slowing down. The Consumer Price Index (CPI) report due out on Friday will be very hot, but we all know that already. Is it already fully updated by the market?

If I was browsing this market based on economic headlines and news flow, I would be extremely bearish. I never remember such a confluence of negative events hitting at the same time. Even at the height of the pandemic, there was more hope than there is now in some places.

I don’t trade the market based on the news. I trade the market based on price action. The price action is what tells us whether the bad news has already been fully priced in or not. Currently, the market is saying that all the bad news has been priced in and stocks are finding good support.

One aspect of this market that doesn’t get much attention is that so many stocks have been in a very long bear market for over a year. This is not an early stage bear market for the majority of stocks. Indices don’t recognize this, but many stocks have already gone through a very extreme downtrend and are finding good lows.

I keep repeating that the number of new 12-month lows isn’t even close to reaching the 3,000 we saw on May 20, and that’s the best possible sign that the worst may have already been integrated.

We have a little positive action on tap to start the day, but the focus will quickly shift to the CPI report due out Friday morning. Bulls are hoping for signs of peak inflation, but energy prices could make that difficult.

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