The market saw a slight change in character on Wednesday, but it wasn't sufficient to signal that a major shift was occurring. It was the first negative day for the S&P 500 out of the last six, albeit very minor. There was also the usual dip-buying of negative China trade headlines and good underlying support, but the close wasn't as strong and the intraday buying not as robust.
It was a subtle shift in the price action but enough to warrant increased vigilance. What was notable on Wednesday was that the overall market ignored the problems in the retail sector. Both Home Depot (HD) and Kohls (KSS) traded poorly and did not attract interest in bargain hunters.
Weak retail seems like a pretty obvious indication that consumer confidence is faltering and that will impact economic growth, but the narrative that the U.S. is heading for a recession has lost its appeal as the indices have hit a series of new all-time highs.
On Wednesday morning, early indications are soft, but that has been an open invitation for dip buyers to jump in at the open. That is the dynamic in price action that we have to watch very carefully for a shift. Computer algorithms drive this behavior and they will continue to do the same thing repeatedly until it stops working. Once it stops working, the shift in the character of the market can be sudden.
The good news is that there was some decent stock-picking action on Wednesday despite the choppy and lackluster indices. Small caps (IWM) outperformed and biotechnology names had a particularly strong day with the Biotechnology index Fund ETF (IBB) up close to 2%.
My approach to this market has been to avoid trying to anticipate a top and to stay focused on watching the character of the price action. When the price action changes then we react and make the proper adjustments. There is still no strong reason to don the bear uniform, but there are a few small warning signs that require attention.
The first test today will be to see what the dip buyers will do with this weak open. A second test will be the reaction to China trade headlines that will likely continue on a near-daily basis.
While the bulls continue to predict impending doom, there are also a good number of bulls looking for some corrective action. The bulls want a pullback because it would be a good technical setup for a rally into the end of the year. We will deal with one thing at a time rather than try to guess where we end up in six weeks.
Right now, I'm watching much more closely for some downside action and am ready to react. It is up to the dip buyers to decide what happens next.