Setting a Good Tone

 | Jul 18, 2014 | 4:36 PM EDT
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The SPDR S&P 500 (SPY) closed the week at almost the exact same price that it started at, but there was quite a bit of choppy action in between. As is often the case, the market completely forgot the negatives that plagued it yesterday, ramping up steadily all day. Breadth was particularly impressive at better than 4 to 1 positive, which is quite a turn after the recent struggles of the small-cap indices.

Decent earnings from Intel (INTC) and Google (GOOGL) helped set a good tone for the flood of reports due next week. If the macro worries can be shoved aside again, we are in good shape for positive reactions to next week's reports, which include Apple (AAPL), Facebook (FB) and Microsoft (MSFT).

Technically, the market has suffered damage lately, but there is hope that the today's action is indicative of a turn in the iShares Russell 2000 (IWM). It found support around the June lows and recovered the 200-day simple moving average, which is a good sign. There was much better action in many smaller stocks today, and market players will be looking for follow-through.

It has been a tricky market lately due to the slowness and choppiness. On Thursday, things looked very poor, but today things look good again. If you sold weakness, you ended up on the wrong side of the market -- but that may be the disciplined thing to do in many cases.

I'm hoping we will see earnings reports provide good stock-picking. We need better catalyst than headlines about Ukraine. With interest rates still at remarkably low levels, the cash out there still has few choices but to buy stocks.

Have a good weekend. I'll see you on Monday.

July 18, 2014 | 10:38 AM EDT

One of the remarkable things about the market in recent years is its lack of memory. The things that cause it to sell off one day are quickly forgotten the next. It never gains much downside momentum even after a tragic event like the Malaysia Airlines crash. Too many folks have been trained to buy weakness automatically.

The best news today is that breadth is much better at close to 3 to 1 positive. We even have decent action in the iShares Russell 2000 (IWM) and Google (GOOGL) and Tesla (TSLA) are helping the momentum names. The biotechnology sector is also acting much better after being punished on the ill-advised valuation comments from Fed chief Janet Yellen.

While the action is better, I'm not rushing to put cash to work. I've added to a position in Spansion (CODE) and chased a starter position in Skyworks Solutions (SWKS) on a good earnings report. I've also cut back a couple of position on bounces, but I'm tentative and want to see how things look as the day progresses. There's been a tendency to go dead intraday and I want to see if the bulls have any staying power.

Technically, the market is still under pressure and the chances of a failed bounce are high. The bears will be talking about potential worries over the weekend, but the biggest problem is that the technical setups are weak.

July 18, 2014 | 7:50 AM EDT

Technical Damage Is Building

  • It is slow going and we have to play defense.

Difficult times disrupt your conventional ways of thinking and push you to forge better habits of thought, performance and being. --Robin S. Sharma

The market's corrective action picked up momentum Thursday on unsettling geopolitical developments. The bulls are still hopeful that the negatives will be quickly forgotten like they have so many times previously, but technical damage is building and underlying support is decaying.

With the Dow and S&P 500 just barely off their all-time highs, bulls are scoffing at a high level of caution, but the real problems with this market are much deeper. Similarly to what occurred back in March and April, we are seeing a deep correction in small-caps and many of the key momentum sectors. The IWM is down 7% in July and the damage to many individual stocks is even worse.

The weak small-cap action is confirmed by poor action in biotechnology and many of the key big-cap momentum names like Tesla (TSLA), Chipotle (CMG) and SolarCity (SCTY). There really is no strong leadership in growth stocks. The best leadership lately has been in conservative names like Microsoft (MSFT), Intel (INTC) and IBM (IBM), but as we know, that is not the sort of stocks that tend to lead the overall market higher.

The tricky thing about this market is how deceptive the big picture looks. If you glance at the DJIA or S&P 500 there has hardly been a blip in the uptrend. It looks like we just have a little pause after a big run, but it is not a true picture of what has really been going on in the market lately.

The slowness of the trading lately has made trading more difficult, but that has been exacerbated by the underperformance in small stocks. Breadth has consistently been poor and there have been few places to hide. Even the momentum stocks have offered few opportunities for longer than a few days.

Earnings last night from IBM and Google (GOOG) were mixed and are producing mild reactions so far. These stocks will be good indicators of how much underlying support there is out there. Usually we see a theme emerge during earnings season and so far it hasn't been very clear. The good reports have seen gaps, but then little further movement. There hasn't been any great urge to chase good news so far and there hasn't been much of an inclination to buy bad news either. 

The indices have been under pressure for a couple weeks now and despite some early bounce action this morning there isn't any reason to conclude that the correction has played out. It is slow going and we have to play defense, which isn't much fun, but there is little reason to believe that another V-bounce is starting at this point.

The market isn't offering us much right now, but that is a natural part of the cycle. We just need to be patient and watch for opportunities as things develop. 

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