Santoli’s Tuesday market notes: Stocks rebound from the sell-off, but is this a lasting comeback?

Published Tue, Jul 20 202112:54 PM EDT

This is the daily notebook of Mike Santoli, CNBC's senior markets commentator, with ideas about trends, stocks and market statistics. A spirited bounce emerges right where it "should" have, led by the groups most primed to rebound. True to form for a resilient bull market that has kept all pullbacks brief and shallow? Or too scripted to trust? The level the S & P 500 bounced from was around the 50-day moving average, which has served as reliable support – if not instant reversals – all year. As shown here, most of these pullbacks involved more than just a single touch-and-bounce off the 50-day moving average usually (but not always) a bit of churn and revisiting involved. So far, the Turnaround Tuesday rally has almost but not quite retaken all the ground lost yesterday. This could be a classic "fill the gap" test of sellers' resolve and buyers' stamina. Every lasting comeback starts with a gap-fill. Not every gap-fill turns into a durable recovery. The already beat-up cyclicals and "beta" sectors that started rolling over in May and June were most primed for some relief and are for sure leading the rebound. Small-caps, transports, energy, industrials. Intuitive but not determinative of the next move. Why the change in tone? Monday seemed a bit of a concentrated Covid-fear relapse and growth scare, encapsulated in the relentless rally in Treasuries. When yields lifted off new multi-month lows this morning, it cleared the path for the dip-buyers in cyclicals. About half the entire post-Covid yield surge was retraced. It's been a trap to declare yields finally bottoming again for months, but today's action eases up the pressure on the recovery trade a bit. The period of sideways action the average stock as profit forecasts rise has moderated valuations on the equal-weight S & P 500 appreciably. All else equal it lowers fundamental risk levels, especially compared to corporate-bond yields and dividend/buyback flows. The first 1% drop after a long calm stretch – as we had yesterday – is not usually a "one and done" situation but typically brings further churn and chop in days/weeks to come. Still, this market has tended to surprise more favorably than average when it comes to depth/duration of pullbacks and time needed to resume a rally. Seasonal backdrop is less friendly. But the history of years when the S & P has gained at least 15% in the first half is generally for further gains ultimately by year's end, even if there's often some backsliding along the way. The Fear/Greed Index got much more anxious than one would expect given the 3% dip in the S & P, likely keying off the bond dynamics and volatility measures. This is net positive for stocks, shows bulls' aggressiveness in check. Market breadth very positive, roughly the mirror image of yesterday's washout, though still a lot of new 52-week lows on the Nasdaq. Still a selective, indecisive, less-generous tape than we had a few months ago. VIX retreat to 20 right in tune with the S & P bounce. The drop of five points off a high creates a spike on the chart that some use as a buying cue. Still, hovering right at 20 as S & P is not quite above Friday's close shows traders not taking the comeback for granted yet.

Traders work on the floor of the New York Stock Exchange.

NYSE

This is the daily notebook of Mike Santoli, CNBC's senior markets commentator, with ideas about trends, stocks and market statistics.

A spirited bounce emerges right where it "should" have, led by the groups most primed to rebound. True to form for a resilient bull market that has kept all pullbacks brief and shallow? Or too scripted to trust?