The saving grace of this market lately has been that there has been someplace to hide. There was some pretty good momentum in big-cap technology names, and if you stayed focused on those, the market didn't seem that bad.
There were still a few places to hide today due to some earnings reports, but the "good" action narrowed even more and overall breadth was quite dismal with 1800 gainers to over 3000 decliners. Semiconductors showed some relative strength and oil bounced a bit, but the new 12-month lows piled up again and there was plenty of poor action in individual stocks.
Technically, the S&P 500 moved back under the 50-day simple moving average and some of the gaps created on the Greece rescue are beckoning to be filled. Downside momentum increased today and it is much harder to paint a positive picture, although the indices still aren't in terrible shape.
We have a slew of earnings reports to help keep things interesting. Amazon (AMZN) is trading up huge on its blowout report, Starbucks (SBUX) is seeing a positive reaction on a minor beat and Visa (V) is up nicely on strong numbers.
AMZN is going to be the star of the show and is acting much like Google (GOOGL) following its report. Like GOOGL, it was focused on cutting costs and putting some profits on the bottom line and the market is rewarding that move. (Amazon is part of TheStreet's Growth Seeker portfolio. Google is part of the Action Alerts PLUS portfolio.)
AMZN will help tomorrow, but there are issues with this market action and so far individual reports aren't enough to get things moving.
Have a good evening. I'll see you tomorrow.
July 23, 2015 | 1:24 PM EDT
Don't Let the Indices Fool You
- ·The market action is not as good as it seems.
There are pockets of momentum but the market action is becoming increasingly narrow and more stocks are languishing. Breadth is about 2-to-1 negative but it would be much worse if there weren't a few names moving on earnings. Semiconductors are leading and a small bounce in oil is helping a bit.
In my opening post I discussed how the indices have done a very poor job of reflecting what is really going on in this market. If you look at the "average" stock in this market, it has already undergone a deep correction.
Of course, the bulls stay focused on the misleading indices and the relative strength in some big-cap names. There standard response to any pessimism is "there is some good stuff." The trick of this market is to be in that stuff, and that isn't always that easy. Chasing breakouts has worked to some degree with Tesla (TSLA), Amazon (AMZN) and Netflix (NFLX), but now we are seeing Google (GOOGL) failing to build better momentum.
There still is some "good stuff" and that will satisfy traders that can catch what is working, but overall this market is struggling and the average stock is in a correction. Don't let the indices fool you into thinking that the action is better than it really is.
July 23, 2015 | 7:11 AM EDT
Led by Laggards
- Oil, semiconductors, gold and cybersecurity names are leading.
The indices are close to flat, but breadth is slightly positive and there's a rotation into the recent laggards. Oil, semiconductors, gold and cybersecurity names are leading. All those groups have been weak recently but are seeing bottom-fishing and, in the case of chips, there is good earnings news. Big-cap momentum names aren't doing much today and that is pressuring the indices now.
The theme lately has been very mixed action with pockets of good momentum but very ugly new lows as well. The new lows number has dropped sharply so far today with just about 175, which is a sign that the bottom-fishing in oil, mining and commodities is picking up.
Earnings movers Fortinet (FTNT), Adaptus Health (ADPT) and Cirrus Logic (CRUS) are helping sentiment, but there is a wall of worry and we aren't climbing it very well. It may just be summer doldrums setting in, but the upside action continues to be narrow.
The good news is that the action the last couple days is technically healthy as we consolidate recent gains and build new support. There are few signs of aggressive selling, and dip buyers remain active. It may be challenging to add long inventory but there still is no reason to be aggressively negative.
I have a few odds and ends in play but nothing substantive. Synergy Pharmaceuticals (SGYP), my Stock of the Week, is acting better and I am continuing to look for ways to deploy capital. I have nibbled on Cigna (CI) on the takeover speculation, but putting substantial cash to work is challenging.
July 23, 2015 | 7:11 AM EDT
Don't Be Fooled by the S&P or Dow
- Sooner or later the indices will revert and start to reflect what is really going on.
Falsehood is never so successful as when she baits her hook with truth and no opinions so fatally mislead us as those that are not wholly wrong; as no watches so effectually deceive the wearer as those that are sometimes right. -- Charles Caleb Colton
Indices like the Dow and the S&P 500 are supposed to provide a shorthand way to view the health of the overall market. When they are moving up, we should be able to assume that conditions are good and most stocks are acting in a positive manner.
Most of the time there is a strong correlation between the action in individual stocks and the indices. In a normal market, about 80% of stocks will move in the same direction as the indices. That correlation is the foundation for the old adage about not fighting the trend. Stocks tend to move together and the indices help to make it easier to see that.
Of course, it doesn't always work that way. There are times when the indices simply don't provide very good insight into the character of the action. Typically, this occurs because of the way the indices are constructed with bigger stocks making up most of the weighting. In the case of the Dow it is higher-priced stocks that are given more weighting, which can be particularly misleading when a stock like IBM (IBM) has many times the weight of another stock with the same market cap.
Recently the major indices have done a particularly poor job of reflecting what is really going on in the market. There have been a small number of bigger-cap stocks that have held up the indices, while under the surface there has been some absolute carnage in the oil, mining and commodity sectors.
What is particularly interesting so far in 2015 is that 60% of the gain in the Nasdaq 100 is due to just Apple (AAPL), Amazon.com (AMZN) and Google (GOOGL) and if you throw in Facebook (FB), Gilead Sciences (GILD) and Netflix (NFLX) that accounts for 80% of the gain. That doesn't mean that the indices are incorrect in showing how a great bulk of the market cap has acted, but they don't illustrate what is really happening in individual stocks.
I've previously have mentioned an indicator from TCNET called T2108 which tracks the number of stocks that are trading above their 40-day simple moving average of price. With the indices close to their highs and well above their 40-day simple moving average you might assume that most stocks are also in the same position. That assumption would be dead wrong. Only about 38% of stocks are above their 40-day simply moving average.
Last October, when T2108 was at the same level the S&P 500 was trading almost 100 points lower. That really goes to show how narrow the market has been for the whole year. The average stock has done almost nothing while the indices are reflecting some pretty healthy action.
The key here is to simply be cognizant of the fact that it is a very narrow market and if you haven't stayed focused on the handful of bigger-cap names that have performed well, you have likely had a hard time keeping pace. Stock picking works, but it requires that you be highly selective and you are not going to be bailed out quickly or easily when you make mistakes.
Typically, in a strong market you can make some mistakes with stock picking because a rising tide lifts all boats, but that isn't the case now. If you are in the wrong stocks, they aren't lifted along with the indices and you need to move on quickly.
This misleading character of the indices doesn't bother the bulls much as they simply point out how close we are to new highs. On the other hand, it is the worst sort of action for many fund managers that are trying to keep pace with the indices, but can't find many individual stocks to help produce relative outperformance.
The bears have been complaining about the underlying action for a long time, but they don't receive much attention because the media is so focused on the Dow. If the Dow is fine, the market is fine and any fund manager that is lagging just doesn't know how to pick stocks.
Sooner or later the indices will revert and start to reflect what is really going on with the great bulk of individual stocks, but the misleading character can persist for a long time. Just make sure you really understand what is going on out there and don't be fooled by the S&P 500 or Dow.
We have some minor strength in the early going. The news flow is fairly quiet and earnings reports aren't stirring up much action.