Stocks are set for a slightly negative open as market participants contemplate several key issues. These issues aren't news, but they are evolving, and traders and investors are trying to adjust and stay ahead of the curve.
The four key issues right now are:
1. The disconnect between the indices and some big cap stocks and the majority of the market. A week ago, it looked like we may finally be seeing some reversal in the market's inconsistency. For weeks the indices have been hitting new highs while breadth was poor and the majority of stocks struggled with corrective action.
That reversed last Monday, Tuesday, and Wednesday, but the indices regained their position on Thursday and Friday while secondary and smaller stocks struggled again. This disparity has created a situation where the indices and some large-caps are technically extended, but many other stocks have already suffered corrections and bear markets and are washed out. There still is no clarity as to how this is going to ultimately resolve itself, but earnings season is going to have some impact
2. China's crackdown on capitalism. China has started a crackdown on a number of companies such as educational tutoring, and that is having an impact on bigger cap names such as Alibaba (BABA) and Baidu (BIDU) . This is having some impact on the technology sector but may ultimately be a positive as it forces capital to flow into U.S.-based stocks instead.
3. The surge in the Delta variant. The headlines are full of stories about the growing number of Delta variant cases, and there are already some lockdowns and other preventive moves taking place, especially in Asia.
Economists and market strategists have been relatively sanguine about the economic consequences in the U.S., where the reopening of the economy continues, and it has actually had the positive benefit of helping to cool off some of the inflation concerns that have been rising. There are worries that new mask mandates and other measures will eventually be taken, but so far, the market has not embraced a pessimistic view.
4. Earnings. So far, about 120 companies in the S&P 500 have reported, and 88% have numbers that were above analyst consensus. The reaction to these reports has been good and has helped some of the big-cap names drive the indices higher. A number of the FATMAAN names report on Tuesday, and we will see if those stocks are now so extended that they are in danger of a "sell the news" reaction. Most of the small stocks still don't start reporting until next week.
On top of those four issues, we have a surge in bitcoin Monday morning on rumors that Amazon (AMZN) may start to accept it as a form of payment and also on some short-covering after a rough patch. That is helping certain speculative names and may be helpful in general for small stocks where confidence has been an issue lately.
We have a slightly negative start, but the main issue is rotation rather than extreme sentiment.