A surge in small-caps helped to drive the S&P 500 and Nasdaq to new closing highs on Wednesday. The DJIA lagged, but it was a very strong day for the overall market as speculative interest picked up in small stocks that have been underperforming for a while.
The question now is whether the market can build on that momentum. There are a couple of potential catalysts that will answer that question. The first is the response to the earnings news that will continue to roll in for the next couple of weeks.
Facebook (FB) put up very strong numbers and has a number of target increases from analysts, but expectations were high and the stock is trading up only about 1% at the moment. The announcement yesterday of a Department of Justice probe into antitrust matters seems to have been quickly forgotten, but the FAANGs have not been the leaders they were.
However, semiconductors, as measured by the VanEck Vectors Semiconductor ETF (SMH) , have stepped up and are filling the leadership role now. That group will be the key indicator of where the market is headed next.
Other earnings last night were problematic. Both Align (ALGN) and Tesla (TSLA) are being hit very hard and semiconductors are pulling back due in part to Xilinx (XLNX) . Ford (F) and Paypal (PYPL) are also trading lower. The bears have been wrong about a dismal earnings season to this point, but the results last night were the worst of the quarter so far.
3M (MMM) was a disaster last quarter, but it put up decent numbers Thursday morning and that is helping to boost the DJIA. It will be instructive to see how well it holds onto the early gains.
In addition to earnings, the European Central Bank interest rate decision is coming up shortly. After some weak economic news out of Germany, there is increased expectations of a cut -- and Mario Draghi is believed to be setting the stage for a series of cuts starting in September. The market tends to celebrate Draghi's dovishness even more than it celebrates the Fed. We'll have a reaction shortly.
Overall, the market remains in an uptrend. Markets at all-time highs don't tend to suddenly fall apart and the response to earnings season is preventing the bears from gaining any edge. When we also consider the dovish central banks, it makes it very tough for the folks that are looking for a market top.
We have a mild start to the day but that will likely change as the ECB news hits.