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By Isabel Wang

Friday’s market rebound was ‘not built on anything solid but something very ephemeral,’ says strategist

Recent rallies in stocks haven’t been built on anything solid, says Steve Sosnick, chief strategist at Interactive Brokers.

Volatility on Wall Street this week was a reminder of just how frail conviction around the stock market has been: Every bounce was sold, every selloff spiraled and investors still were skeptical if it had bottomed.

Then came Friday – almost on cue, buyers finally stepped in, raising the question of whether the sudden rebound in stocks was the start of an actual bargain-hunting spree or just another end-of-week buying blitz in an otherwise fragile stock market.

“Every dip could be a buying opportunity, but what I’m seeing this week has morphed from dip buying to rally chasing,” said Steve Sosnick, chief strategist at Interactive Brokers. “We’ve become so enamored with chasing the momentum that I think it creates the opportunity for ‘air pockets,’ because those rallies are not built on anything solid but something very ephemeral, and that also means that they can reverse themselves very quickly.”

U.S. stocks on Friday came off an extremely turbulent ride on Wall Street. The Dow Jones Industrial Average DJIA and the S&P 500 SPX logged a four-day losing streak earlier this week before Nvidia Corp.’s (NVDA) robust earnings report sparked a strong rally in the stock market on Thursday morning. But that surge quickly flipped into the biggest intraday selloff for the S&P 500 since April as worries grew that the Federal reserve would stand pat in December on interest rates, before stocks reversed again on Friday with a sharp rebound.

Even with Friday’s moves, the Dow and the S&P 500 still logged their worst week since Oct. 10, with each losing nearly 2%. The Nasdaq Composite COMP tumbled over 2.7% this week, according to Dow Jones Market Data.

Sosnick told MarketWatch that the wild swings in the stock market this week underscore how fragile investor confidence has become, with Friday’s rally also appearing fleeting as the market’s underlying fundamentals have barely changed. That could spell trouble for the days ahead.

“When you get this rally chasing, it could really put you on a very precarious footing in the market,” he said. “People buy dips only when they legitimately think stocks are ‘on sale’ for fundamental or technical reasons, but now they are doing it simply because stocks are getting more expensive, and they think they will be able to flip it to someone else who will pay more for that.”

Ben Fulton, chief executive officer at WEBs Investments, said the stock rebound on Friday suggests traders are “still resilient as the rising sun” as they show up for “the early Black Friday sales in the stock market.” However, the problem is that the market recovery can be short-lived if early profit-taking is experienced when the markets rebound quicker than expected, he told MarketWatch on Friday.

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This week’s market action also saw investors rotate into some of the traditional defensive corners on the stock market, as riskier assets such as megacap tech stocks and bitcoin (BTCUSD) came under pressure.

The S&P 500’s consumer-staples XX:SP500.30 and healthcare XX:SP500.35 sectors were among the few areas on the large-cap benchmark index to close the week higher. For the month, these two sectors have surged 2.2% and 7.1%, respectively, compared with the 3.5% decline in the S&P 500 in the same period, according to FactSet data.

Consumer staples and healthcare are traditionally viewed as defensive plays during periods of elevated market volatility. Gold prices (GC00) fell off their peak but have still risen 2.4% so far in November, according to FactSet.

Jim Baird, chief investment officer at Plante Moran Financial Advisors, said the sector rotation is driven more by valuations and less about a classic “flight to safety” trade – with money moving out of stretched megacap technology names and into cheaper parts of the market – rather than a response to stress in the U.S. economy.

“As valuations look pretty stretched in those big-cap tech names, investors are starting to look for other ways to improve their portfolio diversification and be a little less tied to the AI story and position themselves in a more diversified manner,” he said.

“Taking a little bit of those winnings off the table, particularly during periods of uncertainty, can help you sleep at night,” Baird added.

-Isabel Wang

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

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