Consider this chart from Bespoke Investment Group regarding the last two days of equity price action:
Notice that the rally has been led by more speculative areas of the marker -- technology and consumer discretionary.
Consider this in line with the treasury market, which should absorb the outflow of money from the stock market in the event of an equity sell-off. For the last few weeks, the Treasury market rally has shown decreasing momentum (see here and here), with the long-end of the curve moving sideways and the belly of the curve rallying a bit. At the same time, the stock market has found support at the 200 day EMA (see here and here). The question now becomes -- is this rally in the markets the beginning of a new trend, or a simple relief rally from the sell-off?
There are several possible scenarios. This chart from Channels and Patterns Blog offers a very realistic possibility.
That chart makes sense if the market becomes bearish on the second half outlook. While many economists have lowered their growth projections, the consensus is still for second half growth, albeit below trend. However, should we continue to see bad news for the foreseeable future, this is a real possibility.
A second possibility is the current sideways action is a rectangle consolidation, which traders are using to consolidate gains, and take some profits off the table. This makes sense if the current Treasury market stall is caused by a change in growth perceptions rather than concern about a possible default.
Either way, the markets are very much in a "wait and see" mode.