The market action has undergone a change in character this week. It began on Monday when there was a sharp reversal following news that China and the U.S. were close to making a trade deal. It was the first time that good news on trade produced a sell-the-news reaction.
The indices held steady and there were some pockets of speculative action. However, with the market losing confidence over a positive response to trade, concerns about economic growth have taken hold. Market players have been ignoring that issue because they were confident there was still potential for a strong positive response if Presidents Trump and Xi cut a deal, but now they are not feeling so confident that it will lead to a sustained rally.
Here on Thursday the European Central Bank (ECB) was issuing its interest rate policy at 7.45 a.m. ET followed by a press conference with ECB President Mario Draghi at 8.30 a.m. ET. It is widely anticipated that growth targets will be cut and there will be talk about new accommodative policy. The market is obviously worried about the news and we have early selling pressure.
Technically the market now has suffered two distribution days this week, which means the selloff took place on higher volume. Most notably it was small-caps that suffered the most damage, with the Russell 2000 ETF losing around 2%. A big part of that selling was weakness in biotechnology stocks, which are wrestling with the resignation of Scott Gottlieb, the head of the U.S. Food and Drug Administration (FDA), who widely was viewed as friendly to the drug development industry.
Many stocks have become technically extended after the huge rally off the December lows, so a bout of profit taking is not surprising. But the bigger and more important question now is whether they will find some support.
After the brutal fourth quarter of 2018, many market players are fearful of suffering through another downtrend and are likely more inclined to cut positions quickly rather than risk riding them back down. There has been little recent talk about a retest of the December lows because the indices have become so elevated since then, but that concern will grow quickly if some support levels start to fall.
We'll see how the market reacts to the ECB news shortly, but there is no question that the shift in the price action this week demands defensive action. We respected the positive price action on the way up and now we must respect the negative price action as the market struggles. This is not the time to trust that the negative pressures will relent.