After a vicious sell-off last week, the Wall Street is back in the green for the year, bouncing back strongly from their lowest level, which had sent the major indices to a correction territory. Major indices climbed for the fourth consecutive session with the Dow Jones Industrial Average adding more than 1,000 points and the S&P 500 index surging 4.6% — the strongest four-session performance since mid-2016.

Meanwhile, the CBOE Volatility index, also known as fear gauge, slipped below 20 after jumping to above 50 last week.

Inside The Rebound

There are several reasons for a renewed rally in the market. First, the long-term fundamentals remain bullish for stocks given solid corporate earnings and accelerating global economic growth. The euphoria surrounding the tax reform has been the biggest catalyst this year, as it will perk up the economy and save billions for corporations, leading to reflation trade and an earnings boost. Given this, the tumultuous ride in stocks last week has provided investors an opportunity to buy on the dip.  

Secondly, fear of inflation seems to be abating though the core Consumer Price Index increased more than expected in January. This is because a year-over-year increase of 1.8% in inflation is on par with the same period a year ago. This means that inflation is rising but under control. Additionally, downbeat data for retail sales calmed inflation fears. U.S. retail sales dipped 0.3% in January — the lowest level in 11 months, signaling that the economy may not be expanding too quickly.

As a result, inflationary expectation that has triggered the worst sell-off in many years comes out to be temporary indicating that the worst of the market pullback is over.

If these weren’t enough, the Arms Index, also known as the short-term trading index and used to measure buying or selling intensity, suggests that investors are currently in a buying mood. This is especially true as the NYSE Arms Index fell to the lowest level in 15 months at 0.447. It is calculated by dividing the Advance-Decline Ratio by the Advance-Decline Volume Ratio. An Arms index value above 1.00 is a bearish signal while value below 1.00 is a bullish sign. A value of 1.00 indicates a balanced market.