Over the past few months, the market has done a very good job of shrugging off a constant diet of trade war worries. Every time there has been a gap down open on some new headline, the news has been quickly bought.
Last week we saw this occur again as ther was some very aggressive buying in bit cap technology names such as Netflix (NFLX) and Action Alerts Plus holding Alphabet (GOOGL) . That strength was hidden to a great degree as the Dow Jones Industrial Average suffered an eight-day losing streak, which last occurred 40 years ago.
On Friday, the tables turned -- with the big-cap technology names turning down as the DJIA finally managed a positive day. Strength in oil helped the senior indices while technology suffered with some frothiness. A flood of biotechnology IPOs also added an air of excessiveness to the action and the Russell index rebalancing on Friday added some artificial volume to the mix.
At the beginning of the week, the DJIA covered up strong action in the Nasdaq and Russell 2000 ETF (IWM) , and at the end of the week, the DJIA covered up broader market weakness.
The rotational action has been quite dramatic. Now we are into the last week of the second quarter and there is the potential for some window-dressing action as we move into July.
Last week, there was some very good action for stock pickers, but many stocks became extended and reversed hard on Thursday and Friday. The question now is whether they can find some support and make some new runs into the end of the month.
This morning, the action feels gloomy as the trade war issue continues to fester. President Trump continued to make new threats and is preparing regulatory measures that will restrict the ability of China to invest in sensitive U.S. technology.
The market has done a remarkable job of shrugging off these worries, but the persistence of the issue is starting to take a toll. There are political concerns as Republicans in farm states are now struggling with the impact of soybean tariffs that are being imposed by China in retaliation for some of the U.S. measures.
This is a market that is going to require a more defensive stance to deal with increased volatility. Good set-ups should continue to work, but they are harder to find and the reversals can be quite nasty. Take a look at Dropbox (DBX) , for example. The stock blasted higher out of consolidation for three days and then gave almost all of it back over the next four days. It is set to open lower again this morning. There are quite a few patterns like this -- and that is going to keep momentum traders cautious.
We have a poor open on the way, which usually brings in dip buyers. I suspect they will give it another try, but the problem lately is that they don't have the juice to push the market back into positive territory.
This is not a favorable environment out there. Be careful.