The key stories of the Thursday's market were the outstanding pockets of momentum -- primarily in cloud computing, technology and certain China-related names. The momentum was so strong that even some of the bulls were worried that it was becoming frothy, but much of the action was hidden under very sedate action in the DJIA and S&P 500. Stocks like Netflix (NFLX) and HUYA Inc (HUYA) led the day, while department stores and financials struggled.
The bearish spin on this action is that this sort of action signal is a last hurrah for the market. The action is quite narrow -- and it is highly emotional, as unthinking traders worry about being left behind. The movement looks like a blow-off top in some cases and doesn't look sustainable based on fundamentals, news flow or seasonality.
The bullish response is that there clearly is an appetite for stocks. Market players have ignored the G-7 meeting and hawkish central bankers and are not paying attention to news of tariffs on $50 billion of Chinese goods. The trend is strong, the Nasdaq is outperforming and this has been a great market for stock pickers.
It is another classic situation of anticipatory bears that see a slew of negatives battling with reactive bulls that are embracing the positives that are in front of their faces. It may not last, but the bulls are trying to profit while they can, as the bears are willing to underperform as they prepare for the disaster they are sure is coming.
How you deal with this market is largely a function of style. It is no secret that we have split personality action, but whether that is a positive or a negative depends on how you approach it. Trend-followers that stick with a trend to the bitter end are not going to react until they see more negative action. They are going to embrace the momentum even as stocks become quite extended.
I was surprised to hear some traders that tend to embrace super-momentum express concern about extended stocks yesterday. Some of the recent China IPOs, like IQIYI (IQ) have gone parabolic and are quite extended by any measure. There are always a few stocks like this, but there seems to be more than usual right now -- and they stick out because the senior indices are essentially flat.
We have some softness in the early going, as the China tariffs give sellers some ammunition, but we all know how quickly such things can be forgotten by the market. Nothing in the headlines seems to have much lasting impact on the pockets of strength, and until that changes I'll be staying with a bullish bias and individual stock picking.
