Rev's Forum: Strong Open on the Way, but Reasons for Skepticism Exist

 | Jun 19, 2017 | 7:38 AM EDT
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"The essence of strategy is choosing what not to do."

--Michael Porter 

The indices are set to start the week on a positive note as European stocks celebrated an easy parliamentary victory by the party of Emmanuel Macron in France.

Asian stocks are doing well on hopes that China A shares may be included in global indices and the hawkish talk from Janet Yellen about "normalizing" the Fed balance sheet is being forgotten. The surprising Amazon (AMZN) acquisition of Whole Foods (WFM) is still reverberating as well.

The indices struggled some last week primarily due to the Fed interest rate announcement, but such news typically has been shrugged off fairly fast. The only time the Fed really has pushed the market down was back in January and February 2016 when the Fed maintained a hawkish tone while the market was worried about the global economy. The Fed eventually shifted to a more dovish view and that led to the uptrend that has been in place since then.

The bears have been growing increasing confident recently as they believe that the combination of Trump's political issues, slow economic growth, stretched valuations and negative seasonality finally are going to produce the first real correction since the presidential election in November. The bears have been gloriously wrong so far, but they are convinced the day of reckoning is fast approaching.

I've taken on some index shorts recently, not because of the fundamental arguments expressed by the bears but because of some deterioration in the price action. Last week the numbers of new 12-month lows exceeded the number of new 12-month highs on at least one day and we continue to see underperformance in many of the FAANG and high-momentum names. There has not been good leadership lately and I simply don't see many setups in individual stocks.

My view of the market is mostly a function of the action in individual stocks, and for the most part the action has been uninspiring. That doesn't mean it can't quickly revert, but I plan to be very selective with stock picking and will be looking for an opportunity to press index shorts.

One important event that occurs this week that doesn't receive much news coverage is the rebalancing of the Russell indices. Thousands of stocks are impacted by this change. The most prominent of the indices is the Russell 2000 small-cap index. At the close on Friday there were hundreds of large blocks crossed, but all week long brokers and algorithms will be accumulating and selling shares in anticipation of the closing trades. If you are trading small-caps be aware that unusual volume may be a function of the Russell rebalancing this week and that there may be unusual volatility as a result.

We have a strong open on the way, but we haven't had a gap-and-go start in a while. There has been an increased tendency lately to sell strength.

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