Market participants have been battling overbought market conditions for weeks, and on Tuesday it looked like worries about the deadly Wuhan Coronavirus would provide an excuse for some corrective action. Asian stocks were very weak on Monday night and there was some selling in the U.S. on Tuesday, but China moved quickly to address the issue and stocks are already bouncing back on Wednesday morning.
Impeachment coverage is dominating most of the mainstream news flow, but the market remains uninterested in the political battle.
It would have been helpful to deal with the extended conditions if the market embraced some negative news, but it refuses to do so. Small-caps suffered a reversal yesterday and had their worst performance since early December, but the S&P 500 (SPY) held up relatively well and is still hovering near all-time highs.
There will be plenty of talk about the coronavirus and impeachment, but what matters most right now is the response to earnings. Both IBM (IBM) and Netflix (NFLX) are seeing good responses Wednesday morning and expectations for Intel (INTC) on Thursday night are quite high.
This market has a particularly difficult dynamic at work right now. There is a very large faction of market participants who want or expect some sort of pause or pullback, but the market remains stubbornly sticky to the upside. The bad news just isn't generating any sustained selling, although it is logical that it should, based on the extended market.
The dilemma is that the market is too extended here to buy aggressively, but it is too strong to sell or short. That leaves many sitting on their hands and waiting for something new to develop. When the market doesn't pull back on bad news, market participants start inching back in and that pushes up the indices. This is classic "Wall of Worry" action, but the big worry isn't the news headlines. The big worry is that this market is never going to have a meaningful pullback.
My game plan is to try not to become too caught up in timing the indices and focus more on managing individual positions. The poor action in small-caps yesterday causes some concern and it is important to stay vigilant and see if that develops further.
There is some increased focus on stock picking right now as earnings reports hit, which provides a haven for active traders, but yesterday was choppy and sloppy in places and positions have to be managed carefully.
We have a positive open on the way as virus concerns are fading.