Fears that the trade war between China and the US would escalate quickly, cooled off overnight as the Yuan was fixed at just below the key level of seven. There was a sharp dip initially but confidence grew that a currency battle was unlikely to accelerate this point. In addition, trade negotiations are still scheduled for September and the market is hopeful that progress can be made.
Although Disney (DIS) posted disappointing earnings, there were strong reports from a number of secondary stocks, such as Guardant Health (GH) , Weight Watchers (WW) , Invitae (NVTA) and Match Group (MTCH) . These smaller stocks don't have much impact on the major indices, but they do help sentiment and help to shift the focus away from macro concerns and back to stock picking.
When the market is reacting to major issues like the China trade war or the potential for rate cuts by the Fed, it tends to be mostly index driven. Stocks move in tandem and the merits of individual stocks don't much matter. Good fundamentals will not protect an investor from a poor market.
In calmer markets, the focus turns to stock picking, as market participants look for a way to outperform the indices. There is more focus on fundamentals and traders tend to gravitate toward stocks that have good earnings and positive news.
Wednesday morning, we are seeing some renewed interest in stock picking but the big picture is still lurking and is not all that attractive despite the bounce.
Over the past week, the indices have gone through a classic breakdown and bounce. The bounce gained some steam yesterday afternoon following a weak start and it has shrugged off some overnight worries Wednesday morning, but this is not a bounce that can be trusted for long. There is a chance it could turn into another one of those V-shaped bounces that have been so common in recent years, but the risk of a rollover is very high, especially since we are dealing with weak seasonality and a paucity of positive catalysts.
The key technical level that market players will be watching is the low that was hit on Monday morning. For the S&P 500, that is 2822. The closing low of 2844 is also important -- and if it is tested, will likely trigger some selling.
My game plan here is to focus on trading some of the smaller-caps with good earnings. I have a high level of cash and am not going to rush to build any big position trades right now. The market action is creating some mis-pricing in individual stocks but they need news for them to recover. If the broad market stays under pressure then stock picking will remain very difficult.
The Nasdaq 100 (QQQ) is leading in the early going, with a gain of 0.4% as the FAANG names bounce.
