The market consolidation that began on Tuesday is continuing this morning. There was a slight positive bias to the action yesterday, but it was classic digestion after a good run. Some rotation action took place, but the DJIA and the Nasdaq were able to push to new closing highs.
Wednesday morning, better-than-expected manufacturing numbers out of Germany are providing some support, but market players are on hold as they await further developments on a China trade deal. The market is hopeful that the U.S. will cut some tariffs as an indication of positive progress.
Earnings season is shifting to secondary names and there are some big movers in more volatile stocks. Match Group (MTCH) is indicated down about 14% in the early going and GW Pharmaceuticals (GWPH) is down around $17, or 13%, on its earnings report.
We are now in the second half of earnings season, in which less well-known stocks are reporting, and there is a much greater potential for some landmines. These stocks generally do not have an impact on the broad market, but they can influence sentiment and undermine confidence.
The bearish thesis at this point is that positive developments on trade have already been well anticipated, the Fed is on hold and sentiment is positive enough to be a contrary indicator. Variations of these arguments, especially the "sell the news" dynamic, have been in place for a while, but the price action has refused to cooperate with the pessimistic view.
While it is logical for the indices to consolidate at this point, the challenge for market players is to determine if the market works off its overbought conditions with choppy action and little movement or with a higher level of selling that fills some of the recent gaps on the chart of the S&P 500 ETF (SPY) . The gap that was created by the open on Monday morning is the first obvious area of contention. The S&P 500 closed Friday at 3067 and that is the key technical level that everyone is watching at this point.
My game plan right now is to put extra effort into keeping my accounts as close to highs as possible. The key to producing superior returns, in the long run, is to make sure that you are in a position where you don't have to recover from large losses. That is one of the most unproductive things you can do. It is far better to play strong defense when the market action becomes choppy and uncertain.
Since many stocks need a rest at this point, it is becoming quite difficult to find good entry points. I'd be a willing buyer, but there just isn't much that is offering a prudent entry.
As I mentioned on Tuesday, I started a small index short in the form of ProShares UltraPro Short S&P500 (SPXU) . This is intended as a short-term play and I will determine if I want to expand it after watching the action today. We are in for more consolidation at this point, but that doesn't mean there will be much downside in the indices.