Like many other traders, I'm on my hold right now and not doing much while waiting for further developments on China trade. It will be a relief to have this big event out of the way so that we can start to focus more on what will happen to the market into the end of the year.
The big story that the business media have missed recently is the extent to which much of the market has already corrected. There has been a severe rotational correction taking place with various sectors falling one by one. The major indices have covered this up to a great degree and it is not uncommon to hear comments in the media about how the indices are only a few percentage points off their all-time highs.
The good news about this action is that many stocks have already suffered corrective action that isn't unlike what occurred in the fourth quarter last year. The big washout has already occurred in many parts of the market and so there is far less risk that they are going to suffer the same carnage that occurred last year.
The bad news is that the indices are still elevated and if they do correct it is tougher for the already beaten up names to bounce. The bears are convinced that the indices are going to suffer as it becomes clear that the Fed is running out of ammunition and can not stop the economic slowing that is already starting to appear.
The bears have consistently underestimated the ability of the Fed to keep the marker running higher. It will be a substantial change in character if the market rolls over in the face of a rate cutting dovish Fed.
We will see how this develops but my main focus will be on sector action. As third quarter earnings start to roll in we should have some clues as to what groups might start to attract some attention. Stock picking has been as tough as it has ever been lately but that is a cycle that allows turns. We just have to stay watchful and see what charts in which sectors start to develop.
The likelihood of a repeat of the disaster that occurred in the fourth quarter late year is unlikely but the indices are vulnerable so it will be more important than usual to focus on the underlying action. The indices are not likely to offer the same level of opportunity that will be generated by a focus on rotational action.