The indices are looking for a solid open here on Friday following earnings reports from Twitter (TWTR) , Snap (SNAP) and several others. Big-cap names such as Facebook FB see positive sympathy and bonds are lower as fears of slowing growth subside.
The Dow Jones Industrial Average and S&P 500 have recovered more than completely from a very sharp drop that occurred on Monday and they once again are hovering at all-time highs. Unfortunately, on Thursday, the market reverted to the recent pattern of strength in the indices due to a few big-caps while breadth stays negative.
Although the S&P 500 rose about 0.2% on Thursday, the Russell 2000 took a hit of 1.6%, breadth was 2,900 to 5,050 negative, and downside volume was 78% of all volume. This is the same sort of action that occurred last week and eventually led to the sharp sell-off that took place this past Monday.
We are now heading into earnings season, which is likely to cause more rotational action. We are seeing an illustration this morning as social media stocks put up some good numbers, and that is driving sympathy moves in the FATMAAN names. On the other hand, Intel (INTC) is seeing a negative reaction to its report and that is spilling over into the semiconductor sector.
A big question this morning is whether the weak breadth and softness in small-caps was just some routine profit-taking after a strong bounce or if it is a reversion to the same miserable action that occurred for weeks prior to the big pullback in the senior indices on Monday.
The good news is that the bounce action this week has created some good support levels, and those levels have not been tested. In addition, small-cap earnings season is coming up soon and there are likely to be some solid reports. Valuations in many stocks are not outrageous, but the group has seen a lack of liquidity and negative rotation, which has made stock picking quite difficult.
Next week some of the FATMAAN names report earnings and that will be the main focus. The action this morning bodes well for positive responses.