The camouflage provided by big-cap technology shares evaporated today and stocks struggled. Interestingly, breadth was actually a little better than it was yesterday when the indices were up, but there was plenty of red out there and the chasers had far fewer places to hide.
It is probably a good thing that the disparity between big-caps and small-caps closed as it allows for a clearly technical picture to develop. The indices have really not done a good job of reflecting the health of the broad market. It has had much more weakness than you would think if you simply look at the Nasdaq or S&P 500.
Tonight is probably the most important night of earnings this quarter. Reports are rolling in and so far Chipotle (CMG) is a disappointment, Microsoft (MSFT) is mediocre, Intuitive Surgical (ISRG) is running up, GoPro (GPRO) is trading down, Yahoo! (YHOO) is doing little and Illumina (ILMN) is getting hit.
So far, it isn't very good action, but the most important report is Apple (AAPL) and we have to wait a while before it posts. Optimism there is very high and given how stocks are acting tonight it is really going to take a fantastic report and big guidance to get it moving. (Apple is part of TheStreet's Action Alerts PLUS portfolio.)
This is a very tricky juncture as the underlying weakness of the market is becoming more evident. If we don't see better reaction to earnings very quickly, it is going to be very challenging.
Have a good evening. I'll see you tomorrow.
July 21, 2015 | 1:42 PM EDT
Trading Is Dismal Today
- · But earnings tonight will likely shift the focus.
Big-cap momentum stocks have done a nice job of covering up underlying weakness lately, but the poor reaction to IBM's (IBM) report Monday is helping to expose the true nature of this market.
The bulls have been focused on the indices recently, which have been driven by a narrow group of big-cap names including Apple (AAPL), Facebook (FB), Google (GOOGL) and others. They have outperformed and have made the indices look quite attractive. Under the surface, it has not been nearly as positive. A few groups, biotechnology comes to mind, are attracting speculative buying but the average small stock has languished.
The underlying weakness can easily be seen in the poor breadth and the high number of stocks at 12-month lows. Granted that some of that is a function of weak commodities but even in the technology group, particularly semiconductors, it has not been very good action.
We have several big earnings reports tonight, which helps set the tone. Earnings have looked quite good so far, so it will be of particular interest to see how Apple performs on what is likely to be good numbers. Expectations are high and the stock has made a V-shaped move over the past eight sessions or so, which is not a great setup. On the other hand, Google had a very similar setup and it blasted higher on its report when it became clear that the new CFO was making progress in controlling costs.
Apple is not likely to have the sort of surprise Google pulled off, as the market is used to it putting up strong reports. Apple no longer lowballs its earnings, like it did during the Steve Jobs years, so it doesn't need a big beat, but it is going to need more than inline numbers to break to new highs.
Trading is dismal today but earnings tonight will likely shift the focus. We can afford some profit-taking but we need broader strength soon to put this market back on track.
July 21, 2015 | 10:58 AM EDT
Resting Up Before Major Earnings
- There is hesitancy to keep pressing before tonight's reports from Apple and Microsoft.
In the early going we have better breadth, with about 3,100 gainers to 2,100 decliners, but it is still just some select large-cap momentum names that are providing the action. The leaders today are Mobileye (MBLY), Google (GOOGL) and Netflix (NFLX). While bounces in the oil and precious metals sectors are helping breadth, the number of stocks hitting new 12-month lows is still nearly double those making new 12-month highs.
The great challenge of the market lately has been the narrowness of the action. Traders that have focused on pursuing big-cap momentum are seeing a very different market than those that are trying to pick individual chart setups in small-caps and mid-caps. In my review of charts last night there were few setups that meet my parameters.
The market has had a good move and is entitled to a rest at this point. With some major earnings reports due out after the close tonight from Apple (AAPL), Microsoft (MSFT) and a few others, there is a little hesitancy to keep on pressing.
The S&P 500 is making an intraday low while I write but we have some relative strength in small-caps -- not very good trading action but still productive in a longer-term timeframe. Although V-moves may be interesting to trade, basing action like this is what makes for healthier trading that can be sustained longer.
I sold down some Facebook (FB) and made a few other minor sales. I don't see much else at the moment.
July 21, 2015 | 7:05 AM EDT
The Leaders Need to Really Lead
- The underlying action needs to shift if we are going to have a healthy market.
I start with the premise that the function of leadership is to produce more leaders, not more followers. -- Ralph Nader
The market has put together a classic V-shaped move over the past eight trading sessions and the Nasdaq is in firmly in new-high territory, but there is one big issue out that that needs to be corrected if this market is going to continue to prosper. The leaders need to lead.
The problem we have right now is that a fairly small group of high-beta, big-cap names like Facebook (FB), Apple (AAPL), Tesla (TSLA) and Netflix (NFLX) have been driving the indices, but they haven't done a very good job of leading the broader market. They have very heavy weightings in the indices, so the technical action looks good when you look at index vehicles, but the average stock has not been participating and breadth has been chronically poor.
Part of the issue is that commodities have been particularly weak. Both gold and oil-related stocks have been pounded and there were a flood of these stocks making new 12-month lows on Monday. Part of this is due to weakness in economies like China and some of it is due to a stronger dollar, but it has been hidden to a great degree by the big-cap technology names that are driving the indices.
It isn't just the oil and commodity names that have been underperforming. The average stock isn't doing much either. As I've mentioned a few times, more than 60% of stocks in the market are below their 40-day simple moving average of price. There is a bear market in many individual stocks. Strength in biotechnology and a few other groups like solar energy have given aggressive traders some vehicles to trade, but it has been narrow. Stock picking has worked, but the selection of stocks to choose from is very small and it has been a feast or famine.
The bulls will shrug off the complaints about the poor underlying action and will respond by saying, "so buy what is working." That isn't bad advice. If you want to play in this market, you have to stay focused on the stuff that is being chased and there are more than just a few names.
FB, for example, has been a great trade over the past week or so and it has barely ticked down as chasers have piled in. The problem we face is that leaders have to start leading. The narrowness of the action can't carry us for long. Either the strength has to broaden out and more stocks participate or the selling under the surface expands and the very-extended big-cap names start to falter.
Chasing the big-cap technology names has worked well, but a disappointing report from IBM (IBM), a downgrade of Tesla and some concerns about overbought conditions are giving us some mixed indications in the early going. The indices had another positive day yesterday, but the underlying action needs to shift if we are going to have a healthy market.