Stock market price action continues to stave off any real bottom that would lead to a sustained shift in trend to the upside.

A lingering concern for traders is how long the market will continue this cycle of pullbacks and short rallies before breaking hard toward a true bottom.

The answer may not be what traders want to hear.

Stock market bottom not in cards until rates fall

A brisk kick off to third quarter earnings reports last week spurred the stock market higher.

The S&P 500 gained 4.7% for last week in a move that puts the index above its 21-day simple moving average (SMA), according to Mary Ellen McGonagle, Senior Managing Director of Equities at Simpler Trading. Based on price momentum indicators showing positive signals on the daily chart, Mary Ellen sees prospects for further near-term upside.

An even higher push came in the Nasdaq which posted a 5.2% rally for the week, also above its 21-day SMA. The S&P 500 and Nasdaq both posted a follow-through day Friday, after gaining more than 1.6% on volume greater than the prior day.

“While this signals a shift of the markets into a new uptrend, it does not signal the end of the bear market,” Mary Ellen said.

And the Friday rally comes with an asterisk.

The upswing occurred after a national news report hinted at a slowdown of benchmark interest rate hikes by the Federal Reserve (Fed). The speculative slowdown was based on a small part from a Fed official speech and not based on actual reports of lowered rates or any slowdown in inflation.

Still, the bullish response to constructive earnings reports was a welcome relief for the markets, Mary Ellen said.

Positive market reaction to the upswing held to start this week.

In the market today, the Dow closed at 31,499.62 points to jump 1.34% (adding 417.06 points on the day). The Nasdaq increased to 10,952.61 points for a .86% gain while the S&P 500,952.61 rose 1.19% to 3,797.34 points.

Stock market has more room to fall

Mary Ellen is cautious about any upswing in this market environment which has indicated more room to fall.

She pointed out that 75% of stocks in the Nasdaq remain below the 50-day moving average. Among companies with stock above this key moving average, 80% are below $2 billion in market cap – these companies lack earnings and sales to heavily impact the market.

The conflicting dynamic for traders is that the stock market remains precarious – staring at a potential gap down while quick rallies continue.

Earnings reports are contributing to this upswing dynamic. Consider that about 20% of S&P 500 companies have reported third quarter results with 73% of those reporting above estimates.

“We had been anticipating this dynamic as analysts were lowering estimates going into earnings season while corporate management remained optimistic,” Mary Ellen said. “What we were unsure of was investors’ response and so far, it’s been quite positive for the stock of companies that have positive results.”

“While we’re positive on the near-term prospects for the market, we need to be on alert for possible selling as well due to poor earnings results or strong economic data,” Mary Ellen said.

She highlighted the Personal Consumption Expenditures (PCE) price index report slated for release on Friday. PCE tallies prices consumers pay for goods and services.

The Fed is in a “quiet period” leading into its meeting next week. This has traders in limbo for market reaction to any Fed monetary policy changes (such as an expected rate hike next month).

During this lull, Mary Ellen anticipates a continuation of positive responses to better than expected quarterly results.

“However, we’re on the watch for a potentially negative impact from a rise in interest rates,” Mary Ellen said. “Last week, the yield on the 10-year Treasury reached a 17-year high.

“As stated many times, rising interest rates are a negative for stocks – particularly high growth stocks,” she said.

“Before experiencing a market bottom, we’ll need to see reports of lowered inflation as well as more stocks reversing their downtrends on their way to possible base breakouts,” said Mary Ellen, who continues to track high-performing stocks.