Are three straight days of sizable gains enough to wipe out the technical damage caused by the breakdown on Monday?
That is the question we face as we wrap up the week. The market has had strong gains on the last two Fridays, but then trapped the bulls with a gap-down open on Monday. That pattern is likely to be on the minds of some traders as they position for next week.
The most notable and remarkable development this week is how the initial negative reaction to the breakdown in China trade has been overcome. The bears were set for the issue to finally deliver the downside momentum they have been anticipating all year. It certainly looked like a downtrend had a good chance of developing following the worst action of the year on Monday, but the negative narrative never took hold.
What happened instead was that all the folks that were anticipating further downside were caught leaning the wrong way. It wasn't surprising that there was some oversold bounce on Tuesday, but it was surprising when it continued and turned into a V-shaped move. The buying became downright frothy on Thursday, but things finally cooled into the close when the indices gave back a sizable chunk of the day's gains.
Friday morning there is some mild selling, as China signals that it takes a hard line as trade negotiations with the U.S. continue. This isn't anything surprising, as it is quite clear that the trade negotiations will likely continue for months. What has been surprising is how sanguine the market has become about the issue after the initial negative response.
On Thursday, there was some good earnings news from Cisco (CSCO) and Walmart (WMT) that helped to improve market sentiment. In addition, the quarterly filings by some major funds, as well as Warren Buffett, indicated an appetite for big-cap momentum names like Amazon (AMZN) and Google (GOOGL) , which helped as well. That news put the trade issue on the back burner, but the big question now is whether there are some positive catalysts that can keep the market running.
My major concern about the market at this point is whether it can continue to develop positive momentum from here. Seasonality is an issue but, more importantly, there isn't much in the way of positive news flow that is likely to drive the action.
Earnings season is done, which is part of the reason that May tends to have negative seasonality, and the Fed is clearly on hold for now. Trade is obviously going to be a bumpy ride, so what are the likely headlines to keep driving the market higher?
The market doesn't need positive news catalysts to keep running and, quite often, big moves on no news are much more convincing -- but a strong uptrend from this point faces some major hurdles.
I'm still positioned with a very high level of cash and have been distrustful of this bounce. I'll be looking for entry points in some new names, but will be selective.
The market has surprised many people this week, as it has surprised both bears and bulls. Our best approach right now is to stay flexible and open minded, rather than bullish or bearish.