After six straight gap-up opens, the S&P 500 is set to gap down this morning. The recent momentum finally cooled off on Tuesday as the market opened higher and then sold off steadily the rest of the day.
There was no specific news to drive the action, but with Mexican tariffs now off the table and no immediate action on China trade, there wasn't much for the market to anticipate. The Fed and potential rate cuts remains the main issue holding up the market and economic reports will be carefully scrutinized. CPI numbers are due out at 8.30 a.m. ET and any variation from the 0.2% growth expected will likely generate a response.
The market can use a rest after the straight-up move over the past week. Weakness now is more likely a positive than a negative as it allows short-term holders to exit, stocks to consolidate and emotions to cool.
Typically, moves like we have seen don't end abruptly. The strength has created a supply of underinvested bulls that will be looking for entry points so they won't be left out. Many market players do not like to buy strength, but are happy to accumulate as stocks fall back to some support levels.
What this market needs more than anything at this point is some better charts. The straight down and then straight up action that has occurred since May 1 is not the best way to create attractive chart patterns. It takes some mixed action to create bases and consolidation.
While the indices have made a sizable move over the past six days there is a paucity of leadership and small-caps have been notably weak. There was some outperformance by financials yesterday, but FAANGs -- Facebook (FB) , Amazon (AMZN) , Apple (AAPL) , Netflix (NFLX) and Alphabet/Google (GOOG) , (GOOGL) -- have lost their momentum even though they have had a sizable bounce.
Strong markets tend to have some strong leadership groups -- like semiconductors, software, oil, etc -- and right now this market doesn't have any standout groups.
What is going to determine where this market is headed is the reaction to the Fed. The recent rally was primarily due to hope for rate cuts in the next couple of months, although the tariff issue did add some extra movement to the equation.
There is a large group of market players asking this time whether it really is a positive that the economy is struggling to such a degree that the Fed can cut rates. The market has always had an automatic positive response to more cheap money, but this is the first time in a long while that there are concerns about the economic cycle topping. It is a different set of issues this time and the market reaction may not be as celebratory as it was in the past.
At the moment, the market is digesting recent action and looking for the next headline to use as a catalyst. Charts need work and some good leadership needs to develop. There is no reason to be overly negative but not much reason to be wildly bullish right now.
We have a slightly negative open on the way but futures have been slowly improving.