In recent years, one of the most common questions asked by market players is, "How often can we rally on the same news"?
The answer: Far more often than you think possible.
This tendency to keep rallying on the same news gained much traction during the Greek crisis a few years back, but has become much more commonplace as market players react to news about central banks and are now helping to keep the indexes at all-time highs, as we repeatedly rally on hopes about a China trade deal.
The market gapped up this morning on news from China that tariff rollbacks were likely. The indexes just spiked up again when the U.S. confirmed that this was correct. The market has known for weeks now that progress has been made on a "Phase One" trade deal, but it continues to provide justification for even more buying. The good news is never fully discounted and when there is a pullback, it is just a setup for the next repeat of the same good news.
The way that news is discounted and digested by the market has changed quite a bit primarily due to trading algorithms and the proliferation of exchange-traded funds. There are vehicles for pure directional bets that have nothing to do with the merits of the thousands of underlying stocks.
We did have a few weeks when stock picking was working well, but with China trade headlines dominating again, we have reverted to index-driven action. One way to see this is that the Dow Jones industrial average is outperforming the small cap indexes (Shares Russell 2000 Index (IWM) ).
In a market where there is real speculative interest, rather than just directional bets, the small stocks should see some like "hot pockets" of momentum. There is very little of that Thursday, despite the strength, which tells us it's the ETFs and computers that are the prime participants.
That isn't necessarily a bad thing, but it requires that we change the way that we deal with the market if we want to produce superior returns.