Rev's Forum: The Market Is Struggling, but That Is the Path to Progress

 | Jul 10, 2017 | 7:24 AM EDT
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"If there is no struggle, there is no progress."

-- Frederick Douglass

There are a couple of main themes in the market that look set to continue this week. The first is very choppy and inconsistent action. Technology stocks, in particular, have been experiencing a bumpy ride, as the FAANG names have pulled back sharply and many high momentum names in the semiconductor sector have weakened.

(The FAANG stocks are Action Alerts PLUS holdings Facebook (FB) and Apple (AAPL) , Trifecta Stocks name Amazon (AMZN) , Netflix (NFLX) and Google parent Alphabet (GOOGL) )

What has made it tricky is that there have been several bounces along the way. The Nasdaq 100 ETF (QQQ) has had eight straight days of alternating gains and losses. In the early going, there is indication that the QQQ may build on that strength, but the pattern lately has been to flip into strength rather than to chase momentum. We are not seeing the V-shaped moves that were so prevalent for so long.

Oil stocks have also been chaotic, but it is the financials that have made up for most the weakness in other places. The small-cap indices, which are comprised of about 19% financials, have done quite well, although there has been pressure in some of the more speculative technology names. Financials and biotechnology are holding up and that has prevented corrective action in small caps indices.

The major catalyst for the cross-currents in the market is the concern about increasingly hawkish central banks. Bonds have fallen sharply over the past two weeks, but the better-than-expected jobs report on Friday received a positive response.

The issue isn't simply hawkishness or dovishness by the central banks, but whether there is sufficient inflation and economic growth to justify less accommodation. The market can handle higher rates if it is confident that the economic growth is there, but that is the issue.

The bears are arguing that the Fed's economic forecasts are too positive and that the Trump fiscal policies are not progressing, therefore a hawkish stance is not justified. The last correction we had was back in January and February 2016, when the Fed wanted to hike rates but the market was very concerned about slowing growth internationally.

The market still appears to be optimistic about economic growth, and that is preventing the bears from gaining much traction outside technology stocks. Earnings season starts this week with JPMorgan (JPM) , Citigroup (C) and Wells Fargo (WFC) reporting on Friday.

The reaction to earnings in the next couple of weeks is going to tell us quite a bit about the health of the market. Earnings season has not disappointed for a while, and there don't seem to be any major worries at this time.

The tricky part of this market is stock selection. The pockets of strong momentum are quite narrow and if you consider some key names like Nvida NVDA and Tesla TSLA, you can see how difficult it has been to hold positions.

As I mentioned, I covered most of the index shorts on Friday as I'm looking for a bit more of a bounce, but the bears have made progress recently and there is good reason to be skeptical about the market's ability to put together a sustained bounce. V-shaped moves are not occurring as readily at this point.

We have some Monday morning strength, but chasing these opens has not worked as well recently. I'll be focused on some bounce plays in groups like fiber optics.

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