"Oh, it's crashing... oh, four or five hundred feet into the sky, and it's a terrific crash, ladies and gentlemen. There's smoke, and there's flames, now, and the frame is crashing to the ground, not quite to the mooring mast... Oh, the humanity..."
--Herbert Morrison, newsreel of the Hindenburg Disaster
The S&P 500 finished in the red last week after eight straight weeks of gain. The pullback was a miniscule 0.14% but momentum slowed, with most of the blame attributed to uncertainty over the Republican tax proposal that slowly is winding its way through Congress.
Earnings news is mostly over for the key big-cap names, but the FAANG stocks are holding up well and market players continue to look for ways to put capital to work.
The most problematic group lately has been the financials, with the SPDR Select Sector Financial ETF (XLF) dropping every day last week. Chatter about the action in the junk bond market, which can be seen in the SPDR Barclays High Yield Bond ETF (JNK) , has the bears looking at the spread between Treasuries and corporate bonds as a sign that problems are on the horizon.
The bears have their usual assortment of pessimistic arguments, but the primary problem is that the market still is not driven to any great degree by news. There was some reaction to the tax proposals, but it was shrugged off quite quickly. The Trump Asian trip has not caused any major market reaction, but the bears anxiously are looking for some sort of catalyst to take this market down and not much works.
One technical issue that has been receiving more attention lately is the narrowness of the market. This has triggered an arcane technical warning that is called the Hindenburg Omen. The "omen" compares the number of 52-week new highs to 52-week new lows on the New York Stock Exchange and considers whether there is a rising trend. There are a number of other conditions, but the key issue that is considered is the mix of action.
By a variety of measures this has been a narrow market, with nearly 46% of all stocks trading below their 200-day simple moving average. This broad weakness is covered up by some very strong action in the FAANGs and other big-caps, but when those bigger stocks slow the downside can come fast.
The bears have some ammunition, but they have two big problems. The first is that seasonality favors the upside. This is the strongest time of the year and will remain so until the start of 2018.
The second problem is that the trend is still quite strong and very positive. The slight pause last week is exactly what the market needed to relieve some of the overbought pressure. Further downside would be a technical positive rather than an indication of major topping action.
This is a tough market for market timing as the upside is slowing and stock picking is very narrow, but there continues to be pockets of strong momentum and that is where we need to focus to produce superior returns.
We have a negative start to the day, but that often puts the dip buyers to work.