One thing traders can agree on today is it's a very odd mix of action. The indices managed minor gains but it was mostly due to relative strength in some big-cap names. Apple (AAPL) and Facebook (FB), for example, had nice gains that helped push the Nasdaq further into new high territory.
When you dig a bit deeper things become rather murky. We saw a huge number of new lows today. In fact, there were almost twice as many new lows as new highs. Most of these poorly performing stocks are oil, metal or mining related and are a reflection of weakness in commodity coupled with the stronger U.S. dollar.
Even without the poor action in oil and metals, we still saw better than 2-to-1 negative breadth and there is no particular sector strength. Pharmaceuticals, which are usually a defensive sector, was one of the best performing groups today.
When you look at the higher price momentum stocks, you have a completely different impression of the market. Breadth on the momentum screens was about even and there were a number of good movers, including Tesla (TSLA), Ambarella (AMBA), Amazon (AMZN) and GoPro (GPRO). The action in those stocks would make you think we have a red-hot market, but that is not the case. They are chasing liquid big-cap names but it is very narrow and you have to be highly selective.
The bulls are focused on the momentum strength while those with less conviction are worried about the narrowness and the poor relative performance on the average stock. Chasing the narrow momentum seems to be the way to go, but it is not for the faint of heart.
Have a good evening. I'll see you tomorrow.
July 20, 2015 | 1:18 PM EDT
This Action Is Deceptive
- Facebook, Tesla create illusion that the action is better than it really is.
The good news is that the indices are holding up nicely. The bad news is that a small group of big-caps are doing the hard work while the broader market suffers nearly 2-to-1 negative breadth. It is deceptive action and there is a definitely disconnect between the S&P 500 and small-caps today.
Broad weakness under the surface can be a negative but what is interesting about this market is that so many stocks have already corrected deeply. Although the Nasdaq is hitting all-time highs and the other major indices are fairly close as well, more than 60% of stocks in the market are trading below their 40-day simple moving average of price.
You don't see it because big-cap names have had relative strength, but it's a very narrow market. In addition, the business media focus on names like Facebook (FB) and Tesla (TSLA), which helps to create the illusion that the action is better than it really is.
There is some good action, so it isn't justified to be overly negative, but if you aren't in the right names it can be rather frustrating. I'm not hearing much chatter about new buys today as traders seem more interested in watching golf than trying to find narrow leadership.
You can easily find flaws in this market but any weakness can be justified as nothing more than rest after a good run. It may not be exciting action, but it is healthy.
July 20, 2015 | 10:33 AM EDT
Don't Overreact if Charts Start Basing
- Current weakness is not necessarily a negative sign.
The market needed better breadth to keep the V-shaped bounce going and so far we aren't seeing it. The NYSE is running 950 gainers to 1760 decliners while the Nasdaq is a bit better. The momentum screens are about even but, unlike last week, we don't have any heavily weighted name to power the indices. Small caps are lagging and we only have about 140 new 12-month highs at the momentum.
The action isn't that bad but market players aren't showing much interest, and we are seeing some downward pressure on some profit taking. Consolidation here is healthy, but market players are so used to V-shaped action that they tend to overact to weakness, at times. Many charts could greatly benefit from some basing. There is no reason to view it as anything particularly negative.
SolarEdge Technologies (SEDG), Synergy Pharmaceuticals (SGYP), Anthera Pharmaceuticals (ANTH) and a few others are on my radar at the moment. Putting money to work is a challenge, but that is what we need to focus on right now. The opportunities are relatively narrow but there are things working -- if you stay selective.
July 20, 2015 | 07:33 AM EDT
Key to Market Health Is More Breadth
- High-beta big-caps are gaining, but many small stocks are languishing.
"All you need is the plan, the road map, and the courage to press on to your destination."
Will high-beta, big-cap names such as Google (GOOGL) and Netflix (NFLX) continue to lead this market higher? That is the issue this morning as we kick off a busy week of earnings report. Greece has settled down and is no longer jerking us around, and China, other than some stories about hoarding of gold, is not jerking us around, either. Janet Yellen and the Fed haven't offered us much new, so there isn't much left for the bears to complain about.
One possible negative is continued strength of the dollar, which is caused primarily by the increasingly hawkish Fed. The dollar is keeping pressure on oil and precious metals but has not yet become much of an issue for multinationals. If the dollar continues to run up it will be a headwind, but so far it is impacting primarily commodities.
Technically we are seeing a standard V-shaped move once again. The S&P 500 is now up six of the last seven days and is set to gap up again this morning as it closes in on the May highs. The Nasdaq has seized leadership as major components GOOGL, NFLX, Facebook (FB), Amazon (AMZN) and a few others are seeing very aggressive momentum.
The biggest peculiarity right now is the poor breadth. On Friday the Nasdaq gained nearly 1%, but breadth was just 1,100 gainers to 1,650 losers. Obviously some big-cap names are dominating while many smaller stocks are languishing.
The key to market health at this point is for the strength to broaden out. The Nasdaq names need to act like true leaders and drag up some other stocks as well. Typically, market players who don't want to aggressively chase will start looking toward other stocks that have not moved and that will help improve breadth, but we didn't see that at all on Friday.
While the strong dollar and weak breadth are the focus of the bears, the market is in good shape technically. The Nasdaq is a bit technically extended after the Google- and Netflix-fueled moves, but the recent strength has created a big supply of underinvested bulls that will provide support. They want to buy some pullbacks and the market's refusal to dip much will turn them into chasers rather quickly.
The biggest challenge of this market remains stock picking. It is feast or famine right now, with aggressive chasing being rewarded while many secondary stocks aren't doing much. There are not a lot of great technical setups right now, but you certainly can't short when we have this sort of momentum in places.
We are heading into the bulk of earnings season over the next couple weeks and that will help traders who are looking for action. So far earnings season has been a rip-roaring success for the bulls, and that theme has a good likelihood of continuing.
The market could use a bit of a rest and we need to see better breadth, but the bulls are in control and putting money to work remains the No. 1 job right now.