The market action has been deceptive and inconsistent over the past couple of weeks -- if you look at the major indices, you won't see the problems that have been percolating for a while.
The indices remain in technical uptrends, but the S&P 500 and Dow Jones Industrial Average are leading, while the Nasdaq Composite and Nasdaq 100 lag and the Russell 2000 is the worst of the bunch. None of these indices are in bad shape, but the action in individual stocks and several sectors under the surface has been quite poor and not very accurately reflected in the "big picture."
The key issues that I see are:
- Rotational Action. The main reason the indices are holding up is that there's been a constant shift in leadership. For example, the FAANGs and momentum names came to life last Thursday, but failed to build on their strength Friday and mostly let the value stocks lead. As a result, many traders complained about the poor technical action in individual stocks, which wasn't at all apparent in the indices.
- Poor Follow-Through. This is biggest flaw in the market action. Follow-through is a product of momentum, but there's very little of that right now. If you look at the FAANGs, only Apple (AAPL) has been able to produce sustained strength lately. Facebook (FB) , Netflix (NFLX) , Alphabet (GOOG) , (GOOGL) and Amazon (AMZN) have all had some bounces, but aren't really trending upward.
- Lack of Leadership. A third related issue is that there isn't strong market leadership right now. The FAANGs are sputtering and there isn't anything replacing them. Value names like Procter & Gamble (PG) or Post Holdings (POST) don't tend to create sustained momentum; they're bought because they're perceived as cheap. But that perception changes very fast once these stocks rally a bit.
While the action under surface is troubling in a number of ways, there is one big positive -- stocks refuse to succumb to worries about trade wars. Every time there's a headline about how trade wars will negatively impact the market, traders and investors seem to buy the resulting dip aggressively.
For example, the headlines Monday morning are talking about how China is struggling with the trade issue and sounding increasingly hostile, but the market is refusing to fully embrace this negative narrative. Wall Street apparently anticipates an eventual positive outcome, which is keeping a strong bid under the indices.
Elsewhere in the market, there are quite a few earnings reports still to come in the next couple of weeks, but they're mainly from a few oil names and some small stocks. (If you're trading small-caps, make sure you're aware of these earnings dates.)
And lastly, keep in mind that August is peak vacation season on Wall Street. We'll likely see some of the year's lowest trading volume and there can be some deadly dull seasons -- but also some increased randomness in trading. This is typically not a positive time seasonally, but the market has seemed to use conventional wisdom as a contrary indicator quite often in recent years.
Add it all up and despite some negative headlines about the U.S.-Chinese trade war and poor European economic news, we're seeing a mildly positive start to markets so far this Monday morning. The big challenge right now is picking good stocks, and I expect that to continue. Regardless of what the indices say, the underlying action is very challenging.