Rev's Forum: 2 Good Reasons to Go With the Flow

 | Sep 25, 2017 | 7:25 AM EDT
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"Let reality be reality. Let things flow naturally forward in whatever way they like."

--Lao Tzu

Despite some headlines last week about a more hawkish Fed, the major indices continued to hold up very well. Gold pulled back and financials rallied on the prospects of another rate hike this year, but small-caps hit a new all-time high and the other indices traded in very tight intraday ranges.

One shift that has been occurring is weakness in the big-cap FANG names. Apple Inc. (AAPL) has suffered a classic "sell the news" reaction to its new product announcement and has filled the gap on the chart created by the second-quarter earnings report. Inc. (AMZN) and Tesla Inc. (TSLA) also are struggling, but it is the action in small-cap names that is keeping sentiment positive. Biotechnology, semiconductors, some China-related names and a few other small niches have attracted stock pickers and have kept the action positive.

For a couple weeks now, stock pickers have been doing much better than market timers. There has been much better action in some individual stocks while the indices have not made as much progress. Breadth has been quite good, which is reflected in the outperformance of the Russell 2000 ETF (IWM) .

This is the last week of the weakest month of the year and the bears still hope negative seasonality finally may reward their pessimism. However, as we have seen, the market keeps shrugging off potential news catalysts. The Fed could have been a very good excuse for some selling as the news occurred in what is historically the weakest week of the year, but it simply didn't matter.

There are quite a few Fed speakers on the schedule this week and there is some concern in Europe that the far-right party has made some progress and may make it more difficult for Angela Merkel to form a government in Germany.

While there are potential negative news catalysts, there are two things that continue to support the market. First is continued hope that tax policy negotiations are making progress. The bears argue that this is going to drag out and already has been priced in to the market, but there aren't many folks who want to be short if a deal is made.

The second thing that is supporting this market is the unrelenting computer algorithms. They are being triggered to buy on any weakness. Even the Fed news couldn't put a dent in the programs and they also are ignoring weakness in the mighty Apple. It is tough to be very negative about the market as long as this sort of price action exists. Instead of trying to guess when this pattern of action is going to shift, we need to keep watching and wait for an actual change to occur.

We have some slight weakness in the early going as the market digests the results of the election in Germany and looks ahead to comments by Fed Chairwoman Janet Yellen, European Central Bank President Mario Draghi and various other central bankers later this week. It is the end of the quarter as well, and that always has the potential for some mark-up games.

The trend is up, the technical pattern healthy and the market unconcerned about news. There isn't any reason to be negative until something in the price action changes.

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