Despite a two-day sharp rally higher, the stock market remains in an overall bearish trend and the rally may not hold.

Bad news in the economy – such as factory activity slowing and lower job numbers – tends to be interpreted as good news in the stock market. This is because market participants perceive this contrast as increasing the possibility of the Federal Reserve (Fed) easing its aggressive monetary policy.

Bulls should be aware that winter hasn’t arrived and the bears haven’t gone to sleep.

Market rally fueled by bulls, bears not done

Good news isn’t always as good as it seems in the stock market.

For example, energy stocks have rallied this week on news of potential cuts on Wednesday in oil production overseas. The news pushed oil prices higher, but one report doesn’t create a sustained trend.

If the meeting goes sideways, oil production could hold at current levels or be less than the anticipated 1 million barrels per day cut.

Traders must keep in mind that – despite a two-day rally – 80% of energy stocks remain below their 50-day simple moving average, according to Mary Ellen McGonagle, Senior Managing Director of Equities at Simpler Trading. 

At this time, we remain in a bear market and any rally attempts are anticipated to

be short-lived,” Mary Ellen said.

Market uncertainty continues, world economies struggle

The stock market is chopping along in an uncertain phase, and economic data – such as the upcoming U.S. employment report on Friday – could derail current momentum.

“Of course one report does not a trend make, and all eyes are on Friday’s monthly

employment report for further possible evidence of a slowing economy,” Mary Ellen said.

“Overall, global strife, rising oil prices, and elevated levels in the U.S. dollar and interest rates remain as a backdrop for the markets,” Mary Ellen pointed out. “Any continuation rally at this time would be viewed as short-term.”

Fed comments and actions – including standing by aggressive moves ahead following the September 75 basis point rise in benchmark interest rates – have been the primary driver of negative price action in the markets, according to Mary Ellen.

Until the U.S. economy, and even global economies, starts to slow, Mary Ellen anticipates further downside for the markets as the Fed holds to its efforts to slow down 40-year high inflation.

“The speeches from Federal Reserve officials throughout last week highlighted their allegiance to continue to raise interest rates – and hold them there until there’s clear and convincing evidence that inflation is cooling,” Mary Ellen said. “Most concerning were comments that rates will be pushed higher to combat inflation regardless of any possible slowdown in the economy.

This has Simpler’s traders working opportunities with the current rally while keeping in mind that a cooling market may be in the forecast.