Strong earnings reports, mainly in the financial sector, helped to create a positive start to earnings season. With China trade issues shoved aside for a while, the focus shifted to individual stocks and stock picking. Small-caps saw some renewed interest, the badly battered biotechnology sector bounced and some of the broken IPOs found support and turned back up.
There was a pullback in the indices on Friday, but overall the S&P 500 is in a good position technically and is set to test recent highs with a couple of good days of action. The DJIA is being hurt by Boeing (BA) and IBM (IBM) , but the Nasdaq 100 ETF (QQQ) continues to hold near breakout territory -- mainly due to strength in Apple (AAPL) .
While the major indices look technically healthy, they are covering up some very difficult rotational action under the surface. Software, cloud computing, and other expensive technology names are seeing steady distribution. So far stocks like IBM, Adobe (ADBE) and Workday (WDAY) point to a very difficult environment for technology stocks, which will make the earnings reports from some major names this week, such as Intel (INTC) and Microsoft (MSFT) , of great importance.
The indices are not as healthy as they look on the surface due to this rotational action, but the upside is that there are stocks that are benefiting. Retailers have seen some good relative strength and last week there clearly was more interest in trying to find opportunities in individual stocks.
The biggest difficulty that the bears and pessimists face is that the market has shown little interest in reacting to political and macro issues. The Brexit battle is being ignored, the impeachment fight and controversy revolving around President Trump is not having any market impact and the market was relieved to ignore the China issue for a little while.
The bears are also focusing on the narrative that the economy is slowing and that the central banks will be unable to deal with this issue effective. A number of Fed members spoke on Friday and did not sound overly dovish, which helped to produce some selling pressure, but the odds are around 90% that the Fed will cut rates a quarter-point for the third time this year at its meeting on October 29-30.
My game plan is to continue to ignore the macro arguments that are having no impact and focus on price action in individual stocks. There should be some interesting volatility on reports this week and the better action in small-caps is a relief, but if it falters that will be a warning sign for the broader market.
We have a positive start to the day on positive anticipation of earnings reports.
