Rev's Forum: Market Low on Energy but Refuses to Quit

 | Mar 20, 2017 | 7:29 AM EDT
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"Too much action with too little intent makes for wasteful exertion of energy and the confusion between movement and progress."

Steve Maraboli

The S&P 500 hit an all-time high on March 1 following President Trump's speech to a joint session of Congress. The explanation for the strength was a bit vague but was attributed to his presidential demeanor and optimism about his fiscal policy.

Despite the clear technical breakout that occurred that day, the major indices have failed to make any progress over the last three weeks. Momentum has stalled and there has been some limited leadership. Oil-related names, which had been doing well, have rolled over, but Alphabet (GOOGL) , Alibaba (BABA) , Amazon (AMZN) and a few other high-growth big-cap names have helped to cover up broader weakness under the surface. (Alphabet is part of Jim Cramer's Action Alerts PLUS charitable trust and Amazon is part of the Growth Seeker portfolio.)

The most notable development recently has been the market reaction to the Fed. Janet Yellen and her cohorts raised interest rates a quarter point last week as anticipated, but the market reaction was that the tone of the policy statement was dovish and that the likelihood of further rate hikes was diminished. The market reaction lasted for about two hours before reversing on Thursday and Friday.

The challenge of the market at this juncture is that the uptrend is still in place but there is no real energy. There are still quite a few stocks hovering near highs, but breadth has been slipping and there aren't many strong themes. Biotechnology has been the best group recently, but there have been a few other groups such as China-related names, optical stocks and semiconductors that are making occasional runs.

This sort of flattish action has occurred several times in the last year, with a particularly long streak last summer that finally resolved itself with a pullback into the election before the current rally began. This action has proved to be a trap for overly anxious bears many times. Still, it is understandable why the bears start looking for market tops when the indices are stalling and the internal action is weak.

Recently the average stock has been weaker than the indices. As of Friday only about 63% of stocks were trading above their 200-day simple moving averages even though all the major indices are substantially over the same level. Big-cap names, driven by ETFs and program buying, have covered up the weakness.

For many market players, the great temptation is to proclaim that the end is near. It is very easy to make a strong argument on why the market is about to roll over. The only problem is that the price action has not confirmed the bearish thesis. While there are signs of weakness, the bears have been unable to generate any real momentum. They have momentary periods of success, but they really can't generate the sort of pressure that has market players looking for exit points.

It is a tough trading environment, not only because the indices are lacking strong direction but also because individual stock picking is very challenging. There are always a few things working, but it's narrow and the risk of fast reversals is high. Chasing strength may work for a day or two, but then there tends to be rotation into some new stocks that fizzle out after a few days. While there is an uptrend, it isn't one with a large supply of trading opportunities.

As we start the week there are small pullbacks as oil is soft again and the headlines focus on the G-20 economic meeting dropping language about avoiding "protectionism" at the behest of new U.S. Treasury chief, Steve Mnuchin.

With earnings season over and the central banks making their moves in the past week or so, there isn't much news on the agenda. Stock picking is the way to go until the indices develop a stronger trend in one direction or the other.

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