For the last three days the market has struggled to produce a positive change in character but has been unable to make a convincing shift. There have been some positive developments, but market players have remained nervous and uncertain. There is a flat open shaping up here on Thursday that may be what is needed to help set up the next market move.
There have been four major roadblocks to better action. We need to watch for changes in these dynamics to signal whether a more productive market is ahead:
- There has been an inability to produce sustained positive action. The indices have not been able to close strong or to produce positive trend days. Strength has been used as an opportunity to sell and there has not been an inclination to look for support levels to hold. On Tuesday and Wednesday the indices closed poorly after some good buying during the day.
- The inability to embrace good news and produce sustained buying. There have been a number of positive market drivers recently, most notably progress on China trade talks and a more dovish Fed, but buyers have shrugged. The good news is not used as a justification to buy. When the market was rallying earlier this year, there wasn't anything negative that seemed to hurt it. We now have the inverse, with no news being good enough to overcome the negative sentiment.
- The failure of better chart setups to develop. I have been harping on this for a while now as I view it as the heart of what a better market is about. When a decent turn develops there should be a surge in individual stock picking. This ugly correction has created a large number of inefficiently priced stocks. When market players become more confident about buying, those stocks should start seeing better price action and better chart setups. So far that is not happening. There are a few things working but, in general, charts remain poor as there is little momentum or good solid bases.
- There is no surge in the Fear of Missing Out (FOMO) even though many are looking for a year-end rally. The strongest rallies occur when market players start to fear that they are missing out as the market turns. They want to put money to work quickly and, hopefully, catch a decent move. We are not seeing this develop. Instead, there is a desire to sell strength and escape this market. The "buy the dip" mentality has been replaced by a "sell the strength" inclination. That needs to change to produce better price action.
These are the four roadblocks that the market needs to deal with to produce some decent upside. It may be helpful if there aren't any major news events or a big open to trigger the computer algorithms. We will see a clearer picture of sentiment when the focus is shifted away from macro matters.
My primary focus is on stock picking. I'll let the pundits try to predict the big picture while I focus on price action in individual stocks. That will be the early signal of a better market environment, and so far the signals are very mixed.