A warning sign that experienced traders are always watching for is an intraday reversal on good news. The logic here is fairly simple. If good news does not attract a sustained supply of buyers and is sold instead, then it is likely that the market is running out of momentum and the potential for more selling pressure is increasing.
The action yesterday in the Nasdaq, Nasdaq 100 and the Russell 2000 ETF (IWM) was a good example of this. All three indices gapped higher to start the day in large part due to the good earnings report from Alphabet (GOOGL) . There was some other good news as well which I outlined in my opening column, including a substantial stimulus package in China.
A 'sell the news' reaction to these events would have been a much clearer negative but that isn't what happened. There was a rotational selloff instead with some big cap names in the DJIA such as United Technologies (UTX) making a big move on earnings and Alphabet driving the other FAANG names that helped to keep the Nasdaq close to flat.
Under the surface there was some carnage in small caps. Breadth was not terrible but it was solidly red and was at odds with the DJIA that was up around 0.8%.
This action is a warning sign but the issue now is whether the sellers will build on that reversal. There are a number of big news events coming and they are likely to serve as excuses for whatever the market does next.
Market players have been very hesitant to embrace the bearish narratives that bears like Doug Kass have been broadcasting so steadily for so long. Trade war issues haven't had much impact, higher interest rates are being shrugged off and the usual outrage over President Trump ignored.
Today we have a meeting between President Trump and representatives of the European Union. Trump said in a tweet last night that they should do away with all tariffs but that he doesn't expect that to happen. The EU is ready to impose tariffs on US goods should negotiations break down. The algorithms will be ready to trigger on any news about these negotiations.
In addition to this issue there is a big earnings report tonight from Facebook (FB) . FB has been going almost straight up since the outrage over its privacy practices. Market players have not been worried about the drama and are obviously expecting good numbers tonight.
Later this week we have GDP numbers which will fan some talk about inflation as they are expected to exceed the 4% level. The 10-year has been inching up recently, which has helped banks, but inflation worries could be an excuse for some selling at some point.
The intraday reversal primarily in smaller stocks is a reason for concern. We will see how things develop as news events unfold but it is tough to find good charts to buy right now and that is probably the best warning signal of all.