There have been two primary themes driving the market action recently. The first is that bad news doesn't matter much. Despite a number of battles in the trade war and more-hawkish central banks, the indices have mostly shrugged off the negatives. The DJIA and the S&P 500 have lagged slightly, but that has been more than offset by strength in the Nasdaq and the small-cap indices.
The disparity of performance in the indices illustrates the second theme that has been at work recently -- which is very strong pockets of momentum in select technology, China-related and a variety of other names, such as Dropbox (DBX) and Canada Goose (GOOS) .
These pockets of momentum have helped to keep sentiment positive while the senior indices struggle with underperformance by financials, retail, precious metals and oil. There are buyers under the surface looking for action -- and they are not shy about chasing up names like Netflix (NFLX) and IQIYI (IQ) .
This morning we have another skirmish in the trade war, as China imposes a tariff on U.S. oil and other commodities. With OPEC scheduled to meet to increase oil supplies, crude is now hitting a six-week low.
The market has taken the trade war in stride, so far as the overall impact on GDP is likely to be limited. Although there are a number of industries and specific companies that will be impacted, there has not been concern that the trade wars would become a major issue.
This morning, the market is having some second thoughts about the danger of a trade war, but the pattern recently has been to shrug off these scares and find support quickly. What has really helped to prevent damage is these pockets of momentum. The number of stocks at new 12-month highs was over 250, despite the pullbacks in the indices.
What we have to watch for is a failure of the inevitable dip buying. Every weak open we have seen for months has had at least some bounce. We have had a few weak closes after a recovery but that has occurred only after a bounce.
Traders have loved the momentum recently, but it is becoming extremely difficult to find entry points now. The hottest names are extended and prudent entry points will have to develop again. Momentum players don't tend to go away easily, but I'm not seeing much interest in chasing this morning.
The first big question this morning is whether the trade war issue can gain some traction or whether the dip buyers keep bailing it out. The second question is whether those pockets of momentum will continue to perform. At the moment, the answer to both questions appear to be "no," but we will see how the dip buyers act after the open.