"Those who have knowledge, don't predict. Those who predict, don't have knowledge. "
-- Lao Tzu
The major indices hit new all-time highs on Tuesday on good breadth, but the underlying action showed some signs of shifting. While names like Best Buy (BBY) , Applied Materials (AMAT) and Mobileye (MBLY) traded stronger, there were a number of reversals in the super momentum names that have been the key leaders for weeks.
Twilio (TWLO) , Acacia Communications (ACIA) and Yirendai (YRD) reversed intraday and closed poorly. In addition, the indices, while solidly positive, closed at the intraday lows. Closing at the lows is highly unusual in this market. It has only happened one other time since June.
I've written quite a bit recently about how this has been a great market for stock picking. The indices have been trading in very tight ranges for quite some time. There has been a positive bias ever since the Brexit vote in late June, but the real action in this market has been under the surface in a number of very strong stocks.
The question we face now is whether the shift in some of the super momentum names is an indication that the character of the market is about to shift, or is this just some rotational action as a consequence of many names becoming quite extended?
It is interesting that we are starting to see this shift in action occur, as we await Janet Yellen to give a very important policy speech on Friday in Jackson Hole, Wyoming. The obvious bearish logic is that a more hawkish Janet Yellen is going to be the catalyst to shift this market into a downtrend.
The bears have long believed that it would be the central bankers that would be the catalyst for a major market top. We have been hearing the same general argument about this market for years now. Sooner or later, it is inevitable we will experience a nasty correction. That is the nature of markets, but the problem has always been timing.
Is there reason to believe that we are finally on the brink of the long-awaited top? There is never a time in the market when there aren't highly intelligent, logical and compelling bearish arguments. Difference of opinion is why we have markets, but if it was possible to use simple logic to time this market it wouldn't operate very efficiently.
The bearish arguments may sound inevitable but the one great lesson of this market for a very long time has been that you can't ignore price action, no matter how irrational it may seem. Until the price action shifts, talk about market tops is premature.
The shift in the underlying action on Tuesday was a bit worrisome and we will have to watch carefully today to see if it develops further, but make sure you keep in mind that it is Janet Yellen's speech on Friday that is going to determine the short-term direction of this market.We have very mild action in the early going, as the news flow slows and vacation season picks up.