It has been a solid week of positive earnings, but the market's reaction to the good news is a concern. Stocks entered the week with overbought technical conditions, so some 'sell the news' response isn't a big surprise, but this action has been spilling over to the broad market and has killed momentum in most names.
The indices bounced back nicely from some of the 'sell the news' action on Thursday, but it was an uneven bounce, with many of the secondary and smaller stocks still lagging. Breadth was poor, and the lack of trading energy continues to be a problem.
Amazon (AMZN) is continuing the run of good earnings reports for the FATMAAN names and is gapping up on blow-out numbers, but it is not providing leadership for the broad market. The 'sell the news' response that we suffered yesterday morning is causing concern that it could repeat and is preventing better action.
One of the major warnings of a toppy market is selling off on good news. There is no question that earnings have been quite good, so the refusal to chase higher is a warning sign. The good news from the FATMAAN stocks is not helping other stocks, and even FATMAAN names themselves like Microsoft (MSFT) and Netflix (NFLX) are struggling.
To add to the difficulty, many small-caps and speculative names are still struggling and are stuck in a bear market. There has been some relief in the past 10 days, but it has been very lumpy. There will be a day when the pressure lifts, but then it returns, and bids disappear again.
Many small-caps will be reporting earnings in the next two weeks which may be helpful. A lack of news flow is hurting many stocks that have good stories and fundamentals.
The big issue for traders is whether some pockets of good trading action can develop if the major indices start to see more aggressive corrections. There is a huge disparity between many small-caps that are already deep into a bear market and big-cap names that have been hitting new all-time highs. How does the gap between the two close? That is the question that will determine the best trading approach.
Yesterday I suggested watching ARK Innovation ETF (ARKK) as the best indicator of overall market action. It never bounced back very well yesterday and is weak again this morning. Caution is required.