As we enter the dog days of August the market presents an interesting mix of action. There has been an increasing amount of rotational action with some of the most extended big-cap technology names pulling back, but overall market action remains quite positive.
Late last week there were reversals of moves in precious metals, FATMAAN names and some of the high-flying growth stocks, but money rotated into value and there continued to be strong speculative action in small-caps. There has been some selling pressure, but it is not correlated and is trapping overzealous bears.
Here on Monday morning the indices are indicated higher after President Trump over the weekend issued executive orders on unemployment, evictions and other matters as congressional discussions broke down. This saga is far from over, but it is progressing in an unusual way.
In addition to stimulus discussions, there is increased tension with China as it reciprocates with sanctions against 11 Americans, including U.S. Senators Ted Cruz and Marco Rubio, over their stances on Hong Kong. This controversy is likely to escalate but the market already seems to have discounted it to a great extent.
There has been great pressure on market-timing bears to call a top in this market. They cite extended technical conditions, aggressive valuation of Nasdaq 100 stocks, continued growth in Covid-19 cases and economic pressure. The bear case is logical and compelling, but it continues to miss an essential ingredient, which is price action.
While there is some rotational action, it was very interesting to see how small-caps outperformed and breadth remained strong as money rotated out of leaders such as Apple (AAPL) and Microsoft (MSFT) . That rotation is evidence that market players are concerned about valuation and are staying selective rather than heading for the safety of cash.
We are heading into a seasonally weak time of the year but hopes that the economy is going to continue to reopen regardless of the Covid-19 situation seems to be keeping sentiment quite positive. Market players are not afraid to own stocks despite the shrill cries of the bears of the disaster that awaits.
My game plan remains essentially the same. I am managing existing positions tightly and will not allow them to slip much before I hit the sell button. There has been a good cushion of gains lately, but I refuse to give back much. I will not hesitate to be more aggressively if I am seeing red on my screens.
On the other hand, the pockets of speculative trading seem immune to overall market timing considerations. Traders are coming into the market each day looking for the next big mover. They are not concerned about overall market conditions.
My best advice is to stay highly reactive to the market action and do not become caught up in the predictions of the disaster that awaits.