"Remember, then: there is only one time that is important-Now! It is the most important time because it is the only time when we have any power."
- Leo Tolstoy
Many market players are growing concerned that a major market top is starting to form. There are hard core bears that have been anticipating that event for many years but now less dogmatic market participants are starting to worry that it is going to be a rough summer for the market.
You don't have to be a fortune teller to think that the market has some issues. The evidence is right in front of our faces.
These are the issues that are causing concern:
- Poor reactions to good earnings. Earnings season has not produced the sort of price movement that many bulls were looking for. Things started off with a very poor reaction to good reports from the major banks which have been struggling since.
A good report from Netflix (NFLX) produced some positive sentiment and resulted in one day of good momentum but none of the strong reports that followed was able to do much. Very strong reports from Intel (INTC) , Microsoft (MSFT) and Amazon (AMZN) had no major impact on the indices.
If good earnings can't take this market higher then what will?
- Interest rates, a strong dollar and trade wars. There is talk this morning from Pimco that we are now seeing a 'cold currency war'. Asian and European policy makers aren't intervening in the currency markets but they are pulling back on plans to raise rates in retaliation for Trump protectionism policies. This is causing the dollar to strength and is a headwind for the market.
The inverse relationship between the S&P 500 and the dollar was particular strong in 2017 when the S&P 500 rose steadily while the DB Us Dollar Index Bullish Fund (UUP) fell sharply. When the dollar is lower against foreign currencies are goods are cheaper overseas which gives us a competitive advantage. Now with the strong dollar areas, products like smart phones from Apple (AAPL) are more expensive in dollar terms.
- Smart Phone demand has fallen off a cliff. One of the major problems for the technology sector in recent weeks is a steady diet of stories about how smart phone demand in Asia has fallen sharply. Virtually ever supplier to Apple - that has reported earnings so far this quarter - has cited weak demand. Apple reports on Tuesday night and we'll have some greater clarity on this issue but it is a major drag on the technology sector and may have an ongoing impact.
- The overall price action is weak. When the market was trending upward I would dismiss the negative arguments of the bears by saying we need to stay focused on the price action. When it shifts then it is time for us to be more negative.
Starting at the end of January it has shifted and it continues to shift. We no longer have the momentum and leadership that favors a strong bullish view. It may just be shorter term corrective action that results in a healthier market but there is no way for us to know if there is a major trend change or not. We have to proceed with caution and not let hopes for another quick and easy recovery drive our decision.
- It isn't just the overall indices that are acting poor. There are very few good setups in individual stocks. There is no real sector leadership and groups like biotechnology, financials and semiconductors have been extremely choppy at best. When individual stocks aren't working then it's tough to put capital to work
We have a busy week of earnings and then the Fed will be a focus with its interest rate decision. We need to concentrate on the price action. The technical conditions are poor and the big issue is whether good news can generate momentum. If this market can not do a better job of producing positive responses to positive news then we better be ready for a rough summer.