"Context is the key - from that comes the understanding of everything."
-- Kenneth Noland
Stellar earnings reports are boosting the Nasdaq this morning but are having limited impact on the senior indices, so far. While Amazon (AMZN) , Baidu (BIDU) , Intel (INTC) and Microsoft (MSFT) are all trading up strongly on very good reports, the sympathy effect is muted.
After poor responses to a number of reports and the recent market struggles caused by news of falling smartphone demand and rising interest rates, market players have become cautious and expectations for earnings reports have been tempered. That was an excellent setup for the most important night of the earnings season, however, we are not seeing the sort of gap-up open that might be expected in a market that had better momentum.
In addition to the earnings news we have a historic political breakthrough between North and South Korea, a pullback in 10-year bonds below 3% and some softness in oil and commodities. There aren't any major negatives, yet the Dow Jones Industrial Average is indicated lower in the early going and the S&P 500 is flat.
The hesitancy to be more celebratory isn't a huge surprise in view of the technical condition of the indices. The S&P 500 has formidable overhead resistance beckoning at the 50-day simple moving average around 2688. The bears will have that marked as a line in the sand and will be looking at fading strength into that level.
Prior to February, traders would be looking for stocks to blast higher and keep running on this sort of news flow but the character of the action has shifted dramatically and now there is much more concern about the impact of negative news. We aren't shrugging off the worries like we once did and there is a much greater inclination to play defense and take some gains into strength.
Many traders are looking to fade this strength. The indices have suffered four sharp pullbacks since the end of January and chasing V-shaped bounces has been a disaster. The technical conditions are poor and there just isn't any reason to believe that the news Friday morning is going to be enough to put this market back in a solid uptrend.
I believe it is likely that this bounce will fail but I'm going to give it some room to run. If we don't see an immediate reversal at the open, then there is likely to be some underlying buyers worried about being left behind. The good news should cause some support and will likely prevent an immediate failure of the bounce. While I have doubts that this market can gain much momentum, I don't think it is going to offer that much immediate downside.
We also have to keep in mind that Apple (AAPL) reports earnings next Tuesday and is going to be a major catalyst. The recent market struggles have been due in large part to worries that smartphone demand has fallen off a cliff. Reports from several semiconductor companies confirm this but Apple itself has not weighed in on this to any great degree. Apple has already taken a hit but if it actually does cut guidance next week it is going to generate some substantial volatility.
My game plan here is to give the bounce some room and not be too quick to try to short it. In addition, I will be looking at stocks that have not yet reported earnings and see if I can find some that will attract positive sympathy following the strong reports that hit last night, Semiconductors, software, big-cap China and a few other sectors may see some interest.
Keep in mind that the character of this market has shifted. The stellar earnings news is not seeing the same sort of reaction that we would had if there was a strong uptrend in place. Conditions have shifted and sustained upside momentum is not going to come as easily.
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