Risk to the Downside Is Building for Stocks

 | Mar 14, 2018 | 8:20 AM EDT
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"Beware the fury of a patient man."
John Dryden

The indices are bouncing this morning as better than expected economic news out of China is lifting stocks. Yesterday's selloff was widely blamed on the firing of Rex Tillerson but, as I discussed, this was an overbought market looking for an excuse to correct and that headline provided a convenient excuse although the news really didn't have any real market impact.

The special Congressional election in Pennsylvania is too close to call which is preventing the usual punditry but the likelihood is that since the election is so close it will be spun as a negative for Trump and seen as proof that the Republicans will likely lose control of Congress in the mid-terms. That makes for an easy argument for the bears but at the moment that is not yet taking effect.

We also have news of more tariffs against China on goods valued at $60 billion. The market has shrugged this off but the risk of some retaliation is high and that would likely see a market reaction.

Yesterday the market was looking for a negative trigger, since it was technically overbought, and found it in the form of the Tillerson firing. This morning the market has been hunting for a positive trigger as the dip buyers are anxious to give it a go again and they have found it in the form of positive economic news out of China and some fairly dovish comments by Mario Draghi.

What we have to watch for is how well the bounce holds when the market opens. The reversal yesterday created some negative technical conditions and the bears have been a bit more successful lately generating downside momentum. A lower low after the open will embolden the bears.

Since the end of January there has been some of the same positive V-shaped action that served the market so well for so long but it has shifted a bit and there has been more dips and more downside volatility. It isn't as lopsided to the upside as it was in January. The bulls are still quite confident and trust the dip-buyers to continue to provide strong underlying support but conditions have been changing and the risk to the downside building.

My biggest concern about the market right now is that individual stock picking is becoming harder again. The movement in some technology stocks and names like Micron (MU) and Action Alerts PLUS holding  Amazon (AMZN) have given momentum bulls something to embrace but the pockets of strong momentum are narrowing and the bounce we are seeing this morning may not inspire chasing.

If this early bounce does not hold I will be looking to ramp up a more bearish posture. I'm looking hard for long setup in individual stocks but they aren't many there. That leaves me with little choice but to be more defensive.

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