"Even nice things don't make you happy when you're tired."
Good earnings news and big gains from 3M Co. (MMM) and Caterpillar Inc. (CAT) drove the Dow Jones Industrial Average (DJIA) sharply higher on Tuesday, but the broader market was mixed as volatility increased. The trend upward continues, but there are indications that the market is growing weary and in need of rest.
Earnings were the obvious story yesterday, but what was most notable was some shifting in the price action away from pure momentum and into names driven by fundamental considerations. Earnings news is what grabbed the hot money as traders looked for ways to catch some sustained momentum.
Weakness in bonds attracted increased attention as the market contemplates steady economic improvement and who will be named the next chairman of the Federal Reserve. Well-known bond manager Jeffrey Gundlach, who has been negative for a while, maintains that the 10-year bond is at a key level that must hold. The iShares 20+ Year Treasury Bond ETF (TLT) is sitting at key support around its 200-day simple moving average and will be extremely important. Later this week the European Central Bank is expected to announce a reduction in its bond buying, and that may be the catalyst for key bonds to take out support levels.
Although there are plenty of potential negative arguments for equites, price action still is positive and earnings season has been favorable. We did have some negative reports last night from Texas Instruments Inc. (TXN) , Advanced Micro Devices Inc. (AMD) and Chipotle Mexican Grill Inc. (CMG) that are putting some pressure on things in the early going. Technology stocks will be of interest today if the chip weakness spills over. Thursday is the big night for earnings and will determine the next big move.
There is some rotational action occurring as well as a pickup in volatility. The biotechnology group has weakened substantially and the earnings news today hit chips, which have been another leader, The DJIA is seldom a market leader for long and may even be considered a contrary indicator when it shows this much relative strength.
I have been writing for a very long time that we need to let the price action be our guide to the market. Some subtle shifts are developing and action in individual stocks is choppier. I'm inclined to be a bit more defensive, but reaction to earnings news is going to be the main driver. We also need to keep an eye on interest rates.
The bears have anticipated for many years that higher rates would be what kill this market. They have been totally wrong, but with more upward pressure on rates we need to be aware of the potential for a market reaction.
The trend remains is your friend but it is looking tired.
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