As we enter the fourth quarter of 2019 market participants are dealing with a very difficult theme -- namely, that the major indices do not reflect what is really going on in the market.
If you evaluate the S&P 500 or Dow Jones Industrial Average (DJIA), it looks like a very placid market environment with a slightly positive tone. The technical pattern of the indices actually looks quite promising, but under the surface is a different story.
One of the most unusual developments in the past couple months is how significant news events are not impacting the market. The bears have been advancing their negative narrative about a slowing economy and incapable central banks, but it has been ignored by the indices. Other drama such as a spike in oil, trade negotiations and intense political machinations has been ignored. None of the headlines generated by these events has any significant impact on the indices.
The only news event that has had a consistent impact is the vague and questionable headlines about progress on trade negotiations with China. Those headlines have saved the market from weakness a number of times and have prevented the bears from pressing short positions.
The unresponsive indices are a difficult hurdle for traders, but what has made it even worse is that there is some big shifts occurring in stocks and sectors under the surface. This is not at all reflected in the indices but has had a significant impact on traders who are trying to navigate a market using individual stocks and sectors.
There are two issues that are plaguing stock pickers. The first is the most significant sector rotations that we have seen in years. The move out of expensive growth names in cloud computing, software, biotechnology and solar energy has essentially been a crash. The blow-up in the initial public offering (IPO) market brings back memories of how expensive Internet stocks collapsed in 2000. It isn't as severe, but the manner in which it has occurred is very similar.
In addition to the profound sector rotation, there has been a dearth of good stock picking. Small-caps have been performing poorly for quite a while, but recently even the narrow pockets of strong action have disappeared. There is almost no sustained momentum to be found. Leadership is in groups such as utilities and value names that don't typical lead for long.
It has been a very tough trading environment, especially for stock pickers, and it is likely to stay that way as we await developments on the China trade front, third-quarter earnings and the impeachment inquiry.
If you had a tough September, you are not alone. It was one of the toughest months for traders in a while and was even more difficult because the indices did not reflect the issues at all.
The good news is that we are moving toward some events that are likely to trigger a strong reaction in October and that will produce some new opportunities.
We have a positive open on the way here on Tuesday morning but this market has a nervous feel to it and is waiting for a news catalyst to drive the action. I continue to hold high levels of cash as I find it extremely difficult to identify new stock picks.