After a couple of weeks of dull and mixed action and some internal weakness, the market put together a solid rally on Tuesday. The number of new 12-month highs could have been better and breadth could have been stronger, but it is hard to argue with a market where the indices are flirting with all-time highs.
One of the bigger positives was that lagging groups such as small-caps, biotechnology and cloud computing perked back up. Market players not only chased the big-cap FAANG (Facebook (FB) , Amazon (AMZN) , Apple (AAPL) , Netflix (NFLX) and Alphabet/Google (GOOG) , (GOOGL) ) and technology names, but they also looked for some bottom-fishing opportunities, which gave the move a much stronger foundation.
Earnings from Twitter (TWTR) and a few other key names were given most of the credit for the strength, but this was really more about positioning and a higher level of skepticism. There has been some bearishness creeping into the market due to the low volume and dull action. The theory is that this is a symptom of a market that is struggling to find positives to keep it moving higher. There was concern that earnings expectations were too high and that conditions were good for a "sell the news" reaction as reports rolled out.
But when the bearish narrative sounds too reasonable, it is often a good time for the market to do the opposite. Once the early strength held, the fear of missing out started to build and upside momentum sucked in buyers and squeezed the bears.
The big question now is whether the market can build on this positive action. The reversal in Texas Instruments (TXN) , after a good initial reaction to its report, is a concern -- and the bears will be focused on talk that the chip sector is not as robust as the VanEck Vectors Semiconductor ETF (SMH) seems to indicate.
However, there still are a slew of earnings reports coming -- and the overall reaction to the majority has been positive. Ebay (EBAY) and Manhattan Associates (MANH) look good Wednesday morning. After the close on Wednesday we will hear from both Facebook and Microsoft (MSFT) , which will be a big test for market sentiment.
In addition to earnings, the trade negotiations with China pick up again this week. The market hasn't had any trade headlines to react to in a while and there is more skepticism about a deal but there is still the potential that a headline could trigger some buy programs.
With both MSFT and FB reporting after the close, there is unlikely to be a quick reversal of yesterday's gains. We will have to keep an eye on semiconductors, but the trend favors more upside -- and until that changes, there isn't much benefit to speculating about what can go wrong.
We have a mild positive start, but it is quiet out there again which is probably a good thing.
