For those that have been focused on the DJIA and the S&P 500, yesterday was just a continuation of recent weakness. The DJIA closed lower for the eighth straight day and finished below its 50-day moving average.
However what was most significant about the market action on Thursday was that key pockets of strength suddenly disappeared. The Nasdaq and the Russell 2000 ETF (IWM) have been producing significant outperformance as traders have piled into FAANG names like Netflix (NFLX) , recent China IPOs like iQIYI (IQ) and a variety of biotechnology, technology and other names.
The excellent action in certain areas of the market has kept sentiment quite positive despite the dismal action in the DJIA and sectors like financials and retail.
The dynamic that has been rewarding individual stock picking and pockets of momentum changed yesterday as aggressive profit taking hit the 'hot' stocks across the board. There was no safe haven on Thursday as breadth sunk to 1800 gainers versus more than 5000 decliners.
Many of the stocks that were hit had become quite extended and were due for a rest. The FAANG fans were downright euphoric on Wednesday and it was a classic response to see Netflix reverse to red after several analyst gave the stock some huge price targets.
The big question that the market is presenting now is whether this reversal in momentum is just a bout of profit taking that will be forgotten as the market regains its footing or is this the start of a major change in market character?
For years now, it has been a mistake to become overly negative after a day like yesterday. The market has consistently done a great job of shrugging off these reversal days and seems to have no memory of any worries from day to day.
In the early going this morning, market players are embracing a number of positives. There is some upbeat economic news out of European, the bond situation in Greece and Italy is improving, there is talk about negotiations with China before tariffs are imposed next month, and oil is up as OPEC seems to be reaching some consensus on an increase in output.
While the action yesterday was uncomfortable for stock pickers and momentum players after a good run, I don't expect them to give up and run for the safety of cash. As the indices stabilize, I expect to see the hunt for setups to accelerate. The longer the indices hold up the more likely that traders are going to start putting money to work.
The action yesterday caused some unhappiness and worry but that may be a good thing. Traders were becoming a bit too overconfident and they needed to be reminded of the fickle nature of the market beast. Action like yesterday helps to create new opportunities and our job is to identify them and go to work.
Right now we have a decent bounce in the early going but the key will be that the indices stay in positive ground after the opening belling. Downtrends are primarily a product of failed bounces and that is what we have to watch for.
