Rev's Forum: Problems Simmer, but It's Still Too Early for a Bearish Bias

 | Nov 14, 2017 | 7:10 AM EST
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IWM

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"Worry is the interest paid by those who borrow trouble."

--George Washington

Monday was another very quiet session for the market indices. The S&P 500 and Nasdaq rose 0.1% while the Russell 2000 ETF (IWM) small-cap index lost 0.01%. Breadth was negative and more stocks were hitting new 12-month lows than highs on the New York Stock Exchange and Nasdaq.

There were some pockets of strength on Monday, with Roku Inc. (ROKU) , 58.com Inc. (WUBA) and Nektar Therapeutics (NKTR) leading the momentum names. The FAANG names held up and that was the key to keeping the indices steady.

There is nothing compelling about the market action in either direction. The bears will focus on the poor breadth and the high number of new lows while the bulls will shrug and point at the indices, which remain in an uptrend and near their highs.

The question for market players is whether we should start anticipating some problems. It is easy to make a case for why this market should correct. It is extended, hasn't had a meaningful correction in a year, the underlying action is poor and the potential for problems in the tax debate are high. Central bankers are less accommodative and there are indications the economy may not be quite a robust as many believe.

The case for a market correction is easy to make and quite compelling. The problem is that the price action refuses to confirm the pessimism. Over 45% of stocks are already trading below their 200-day simple moving average of price. They are not at all extended. The great bulk of stocks do not look anything like the major indices but since we focus so much on big caps that push the indices most people have an incorrect view of what is going on.

The most logical thing for the market to do is for the big-caps to correct and catch up with what the great bulk of the market is doing. That is already occurring as the indices tread water. The problem is that when big caps correct, the secondary stocks usually stay under pressure as well. There isn't much appetite to buy when the Nasdaq is negative due to pressure on names such as Apple Inc. (AAPL) and Amazon.com Inc. (AMZN) .

It is very tempting to bet on the indices to go down, and when you look at this poor breadth there seems to be support for it to happen. However, yesterday morning we saw how robust the dip buyers still are. They jumped in and kept the market even. There weren't any big gains, but that underlying support was tenacious.

The best approach continues to be a reactive one. Focus on finding good stock picks even though it is narrow and don't worry about the indices topping until there is further evidence in the price action. Watch those dip buyers and watch how the market closes the day. Those things need to shift to justify a more bearish approach.

There may be some troubles brewing, but they have not taken hold yet and it is premature to think that this market has hit a top.

We have another slightly negative start on tap and not much news flow to move things.

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