The market had a very strong oversold bounce this week but it ran out of steam on Friday afternoon. The bounce was so strong that it had bulls chattering about V-shaped moves again, but after hitting highs at midday some profit-taking set in and we had the first weak close since Monday.
On Monday, the market looked like it was on the edge of the abyss, but as has happened so often when we are at this point, support kicks in and we go back up as if there isn't a worry in the world. There wasn't any obvious positive catalyst for the big bounce other than being a bit technically oversold, but that is the way it works.
The bears are still focused on a long list of negatives. Oil and commodities are still under pressure, China is rolling over again and earnings season hasn't been all that great. The one positive is that expectations of a rate hike in September have diminished, which is well illustrated by the action in the iShares 20+ Year Treasury Bond ETF (TLT).
Earnings season is quickly winding down as we move into the dog days of summer. Seasonality is working against the bulls and if this bounce fizzles out next week, there are going to be some issues. The weak close today is a bit bothersome and calls into question how much more one-sided action the bulls can manage.
The positive today was that selective stock picking was working fairly well. There were some good movers, but it has not been very consistent even though the indices may appear so.
Have a great weekend and I'll see you on Monday.
July 31, 2015 | 11:22 AM EDT
Another Slow Start, Another Up Day
- · It sort of feels like holiday trading.
For the fourth day in a row, things started slowly but buy programs kicked in and we have moved straight up. We have excellent breadth today with about 3,850 gainers to 1,600 decliners. Small-caps have good relative strength and biotechnology is back in the lead. The momentum screens are looking quite good as well. It feels a bit like holiday trading, but maybe there is just a good mood because it's a pleasant summer Friday.
Four straight positive days have the bulls taunting those who had doubts about the likelihood of another V-shaped move. These moves have never been very logical, but they are amazingly consistent. Some folks have thought a less-dovish Fed would put an end to them, but that has not been the case.
The challenge of the V-shaped move is that it forces traders to chase if they want in. This sort of action doesn't create good bases or support levels. It is one of the big reasons so many bulls seem to be chronically underinvested.
I've been working a few trades. Some of the things on my radar are Mobileye (MBLY), Facebook (FB), Fitbit (FIT), Guidance Software (GUID), Ziopharm Oncology (ZIOP), BioTelemetry (BEAT), Synergy Pharmaceuticals (SGYP), PGT (PGTI) and Builders FirstSource (BLDR). The good action in small-caps is quite helpful today. (Mobileye is part of TheStreet's Growth Seeker portfolio. Facebook is part of the Action Alerts PLUS portfolio. Builders FirstSource is part of the Stocks Under $10 portfolio.)
I still have plenty of idle cash and the V-shaped move makes it challenging, but the mood of this market is surprisingly positive today.
July 31, 2015 | 7:05 AM EDT
The Bulls Have the Edge, but not a Big One
- ·One of the biggest hurdles right now is seasonality.
"It was a splendid summer morning and it seemed as if nothing could go wrong."
Things little negative early in the day, but the bulls regrouped and managed to build on the recent bounce. We are up three days in a row, but the momentum has been slowing as overhead resistance presents some obstacles.
The bulls are telling us that this is another routine V-shaped move and that we should be looking for a retest of the July highs fairly soon. The bears are telling us that this bounce doesn't possess the same qualities that have resulted in so many other V-shaped moves.
The key questions about this recent move are the relative weakness of the iShares Russell 2000 (IWM) and Nasdaq versus the S&P500, the narrow leadership, seasonality, continued pressure on oil and commodities and the issues in the China market.
Earnings season is starting to slow, but overall it hasn't done much to support the market. We started off well with some big moves in Netflix (NFLX), as well as in Action Alerts PLUS charity portfolio holding Google (GOOGL) and in Growth Seeker portfolio holding Amazon.com (AMZN), but even the strong reports haven't been able to garner much additional momentum after the initial burst higher.
Yesterday, Facebook (FB), which is another holding of the Action Alerts PLUS portfolio, failed to gain any traction on a good report and last night LinkedIn (LNKD) bagged traders that were too quick to buy what looked like a solid beat.
One interesting aspect of the three-day bounce we've enjoyed is that on all three days the Nasdaq and IWM were negative early in the day before things turned and we ended up with good closes. There was a high level of nervousness early in the day, but in each case it looked like computerized buying went to work and that helped to turn the market tide.
The strong closes made things look pretty good, but buyers seem much more hesitant to trust the market lately, and the confidence that we can see another V-shaped bounce is quite low.
One of the biggest hurdles we have right now is seasonality. It has been slow lately, but it is going to be even slower in August, which is peak vacation time on Wall Street. This is historically the worst time of the year for the market and it becomes even more challenging when volume slows and sustained momentum, in either direction, becomes less common.
The easy call right now is to look for the three-day bounce to struggle, especially since it's a summer Friday and the last day of the month. Window dressing has already come to an end and there is often some last-minute selling after an end-of-the-month bounce, as money managers position for August.
The ability of the bulls to bounce back from negative territory and close near the highs for three straight days gives them the edge, but it isn't a big one and the quality of setups in individual stocks is quite low. There isn't any reason to be aggressively bearish here, but there isn't any reason to be wildly bullish either. The bulls have an edge, but there are issues and stock-picking is very challenging.
In the early going, we are looking at a flat open, but that has been good for the market lately. Early dips are being bought and we have to watch for that pattern once again. Volume should be light and the action choppy, but there is support, and that is the key right now.