The indices, especially the Dow Jones Industrial Average (DJIA), are supposed to be an easy and convenient way to gauge the health of the stock market. When the reporter on the nightly news tells us that the Dow was up 114 points today we can assume that it was a positive day for most stocks.
Most of the time it works rather well. Stocks do tend to move in correlated fashion. But there are times when the indices can be downright misleading. This week was one of those time when the indices did a very poor job of telling us what was really happening. Not only were the indices misleading but they misled in a very different way as the week progressed.
To start the week we had gap-down opens caused by trade-war headlines. Those poor opens were bought but the indices remained in negative territory. The indices didn't look very healthy at all, but under the surface there was some extremely strong action in technology, biotechnology, China names and the big cap FAANG -- Facebook (FB) , Amazon (AMZN) , Apple (AAPL) , Netflix (NFLX) and Alphabet (GOOGL) -- stocks.
That aggressive momentum hit euphoric levels on Wednesday and profit taking kicked in on Thursday. The very strong stock picking action petered out and the selling broadened to the stocks that have been holding up.
The transition was completed today when the indices ran higher but the pockets of momentum disappeared and there was broad weakness. If you looked at the DJIA today, it looked pretty good, but under the surface there was some very poor action.
The week started off great for stock pickers but ended with a struggle. The Russell rebalance at the close resulted in some big blocks that are going to cause many small-caps to have big volume bars which may be very misleading.
Overall, all of the indices, except for the DJIA, are still in pretty good shape. The slowdown in momentum may excite the bears a bit but some pullbacks in overheated names like Netflix may not be a bad thing.
We wrap up the second quarter of 2018 next week and that may provide a little window dressing action to help stock pickers.
Have a great weekend. I'll see you on Monday.