"Our real discoveries come from chaos, from going to the place that looks wrong and stupid and foolish."
-- Chuck Palahniuk
As we wrap up the month of October and start the best time of the year for stocks, there is no shortage of news for market players to contemplate.
For months the market has largely ignored news about central banks, earnings and economic growth and remained stuck in a trading range, but in the past couple of weeks underlying weakness has been growing and has resulted in a technical breakdown of small caps. The Russel 2000 ETF (IWM) is now back to levels it traded at in mid-July and is in a technical downtrend.
This damage is largely ignored by the senior indices that are still holding about the lows of recent weeks. A few big-cap names have helped to hide the damage, but strong earnings are being sold and there is no real leadership to be found.
In addition to the technical challenges of the market, there is a flood of news. The latest development was the renewed inquiry into Hillary Clinton's email. According to polls she still maintains a significant edge in electoral votes but this news is still impacting the market as it may change the outcome of down-ballot elections. The likelihood is that this issue is not going to go away for years, even if the election goes the way the pools are predicting.
In addition to the election uncertainty, we have the OPEC deal falling apart, more merger news, weaker bonds, a stronger dollar, speculation over the potential for a Fed rate hike and seasonality. The market has been largely ignoring big issues, but the downside has been gaining some momentum now and the potential for more technical damage is increasing.
My biggest concern about the market is that individual stock picking has become extremely difficult. There hasn't been sustained upside momentum for a while and now we are starting to see more damage to support levels as small caps struggle.
A month or so ago the market was in a trading range, but the big difference then was the very strong stock picking that has taken. A number of stocks that were leaders back then such as Acacia Communications (ACIA) , Twilio (TWLO) and even Growth Seeker portfolio holding Amazon (AMZN) have fallen apart and are not seeing much support. Stocks with good news like Action Alerts PLUS portfolio name Alphabet (GOOGL) and Tesla (TSLA) can't seem to generate momentum on their earnings reports.
The good news is that some small caps may be washed out and ready to bounce after the recent weakness. The news media have largely missed how poor the action has been under the surface. It is bad enough to be ripe for an oversold bounce.
The biggest problem right now is the election uncertainty. Although the polls still clearly reflect a Clinton victory, the market seems confused and unhappy about the choices it has and isn't confident how it is going to develop. The FBI has added an extra layer of complexity and the market doesn't like that much.
It is a very chaotic market situation right now and the vast majority of stocks are not acting in a positive fashion. We may be due for a bounce, but this is a market with some problems and we need to remain cautious as we watch it develop further.