While it was not a particularly interesting or positive day, it was productive. After the frenzied buying yesterday, it is a positive to churn and digest the gains. This gives the short-term flippers an opportunity to claim their gains and for longer-term holders to buy without having to chase.
The bears will argue that the rollover is coming. The bad news is going to weigh on this market sooner rather than later and those Pollyanna bulls will pay a price. The pessimism is understood, but the problem is that the price action isn't supporting it. We still have some overhead resistance to deal with, but the action since the ugly September jobs news has been quite positive. There was a straight-up run, a couple of days of selling as we consolidated and then another spike before we rested today. We aren't extended or overbought and we have some underlying support.
Although it was a rather dull day, we did see the buyers step up at the day lows and drive us right back to the highs. That sort of intraday dip buying is a good sign. When the bulls have idle cash, they tend to be aggressive at jumping on that sort of selling.
Next week, the earnings will roll in. The nice thing is that this usually creates some tradeable action in individual stocks and shifts the focus a bit from the macro. The bears are still anticipating some poor reports, but low expectations are a good prop for the action.
There are plenty of folks willing to tell us why this market is doomed, but if you simply consider the price action, there is good reason for some optimism.
Have a good weekend and don't forget to celebrate the triumph of the mighty Michigan Wolverines over the evil Michigan State Spartans on Saturday. I'll see you on Monday.
Oct. 16, 2015 | 11:50 AM EDT
A Positive Bias but Short-Term Churning
- ·Another squeeze on the bulls wouldn't be a surprise.
The market is working hard to hold on to Thursday's outsized gains. One of the biggest challenges lately is catching sustained momentum. Even when we have had good runs the leadership has shifted and much of the strength has come in the worst stocks.
So far today we are seeing consolidation of Thursday's move. We have some slight pullbacks and breadth is running about 2,350 gainers to 2,900 losers. Selling is mild and is mainly taking place in oil and solar sectors. Biotechnology and drugs are doing a decent job of holding on to their gains. The FANG names are green as well, although Netflix (NFLX) continues its recent struggles.
The bears are biding their time as they hope that the flow of bad news will again become an issue for the market. The bulls are basking in the glow of a dovish Fed and feel confident that will help to keep a bid under the market. There are plenty of underinvested bulls, as I am, that have not been able to put much money to work. That is the big challenge I see and I'm tired of repeating it.
Over the next two weeks we have the meat of earnings season and that is going to be the main focus. Reports have been mediocre so far, but there are a few bright spots like General Electric (GE). If the bears are going to have a chance, they have to count on continued poor reaction to earnings news. Expectations are already quite low, so the chances of disappointment are less.
While I believe the overall market has a positive bias, we may still see some churning in the short term. The longer we continue to hold up, the more it is going to draw sidelined cash into the market. I see no edge on the short side right now as the bad news simply doesn't matter.
My game plan continues to be an active hunt for some new stock picks. It is all about finding good setups and that is not easy. I've added to a couple things like Trevena (TRVN) and MaxLinear (MXL) but it is small buying.
Keep an eye on the highs of the day as another squeeze of the bulls would not be a surprise.
"At first, addiction is maintained by pleasure, but the intensity of this pleasure gradually diminishes and the addiction is then maintained by the avoidance of pain."
-- Frank Tallis
The market is addicted. Its drug is near-zero interest rates and the Fed has agreed to continue to supply it for at least a few more months. This addiction may end up causing some long-term damage, but that is irrelevant. The market simply doesn't care about anything else as long as the supply of cheap money continues to flow.
Yesterday, the bears discovered once again how powerful that addiction is. There is a long list of negatives out there, and they simply don't matter. Lousy economic conditions around the world and some problematic earnings are not just irrelevant, but they are celebrated as they justify keeping interest rates low.
Some folks might argue that after six years, it is quite clear that the Fed policy of low rates has been ineffectual. It has helped to prop up asset prices in various sectors, including the stock market, but it has done nothing to bolster economic activity -- as planned. Cheap money has kept the stock market running upward, and investors want more, even though they know it would be a sign of health if the supply was cut off and interest rates went higher.
That is the position we are in, now. The negatives are shunted off to the side and bad news is viewed as just another reason to celebrate a dovish Fed. How long can it last and how high can the market go? The answer is much longer and higher than you think. It is trite and simplistic but 'don't fight the Fed' is the best investment advice of the last six years.
Technically, the market is reflecting this celebration of low interest rates. The big rally began, following surprisingly bad September earnings reports, and had another push the other day, following an article in the Wall Street Journal stating that the Fed was likely to hold the trigger through at least the end of the year.
The bears were thinking that the market has grown weary of this addiction to a dovish Fed, but that isn't the way addictions work. The addicts don't care about all those very compelling and logic arguments. They have their drug, and that is all that matters. To heck with the negative consequences down the road.
Chinese stocks rallied overnight, and there is some merger activity, over there. We have sentiment reports coming up and GE (GE) earnings are seeing a slightly negative reaction in the early going. The bulls need to hang on to a good chunk of yesterday's gains to set things up for another leg higher. Technically, things look pretty good but the bears will be growling about all the negatives out there.
Price action trumps news flow. Keep that in mind as you consider the action.