It isn't the mountain ahead that wears you out; it's the grain of sand in your shoe. -- Robert W. Service
A weak dollar and stronger oil are helping to put a bid under the market and it's a good thing because earnings season isn't helping much.
The reports that hit after the close last night were quite poor. LinkedIn (LNDK), Tableau Software (DATA), Deckers (DECK), YRC Worldwide (YRCW) and Outerwall (OUTR) all disappointed and were trading down sharply.
One of the most worrisome things about the response to earnings reports is that the bad news is obviously not priced in already. Often, we see major market bottoms form when stocks just don't go down much more on bad news. When market players are willing to buy the bad news, it signals a positive change in market character.
The main theme we are seeing right now is rotation. Oil, biotechnology, precious metals, mining and a few other groups that have been under pressure for many months are washed out and seeing some underlying support. Market players are showing more interest in trying to catch some of these stocks at their lows.
At the same time, we have relative weakness in big-cap technology names like Alphabet (GOOGL), Amazon (AMZN) and Tesla (TSLA). There is pressure in other groups like banking and retail. These stocks and groups have not fallen as much as other groups and now they are starting to catch up.
The major indices still do a very poor job of reflecting what has really been going on in the market for nearly a year. There is very ugly bear market action in the majority of the market. Only about 18% of stocks are over their 200-day simple moving averages and that percentage has been trending down since July 2014. If you look at that chart vs. the indices, this looks like a very long and ugly bear market.
The main dilemma market-timers face right now is that the indices continue to look like they are still under pressure while many individual stocks may already be close to a bottom. The problem is that it is very difficult for stocks to buck the trend when the indices are still under pressure. Stocks tend to be correlated with the indices, although that wasn't the case to the downside recently.
We have the monthly jobs news coming out and that is going to shift the focus back to the Fed once again. A while back there was the attitude that jobs news was a win-win situation. If the number were poor, that meant that the Fed would be dovish and support the market. If the numbers were good that meant the economy was improving. Since the Fed was in no rush to raise interest rates there was no downside to the jobs news.
The view now is different due to the recent Fed hawkishness. If we have a strong report it means that the risk of higher rates kicks in again, but if we have a weak report it means the economy still stinks and the Fed isn't going to do anything but delay rate hikes.
My biggest concern about the overall market is that central bankers are out of ammunition just as economic indicators are declining. We have lived off the kindness of central bankers for many years now and that dynamic is shifting. The poor earning last night are just another illustration of the obstacles that we face.
We'll see what the jobs report brings and go from there. I'm inclined to look for short entries into strength at this point.
