Since the market bottom last Dec. 24, the most notable feature of the market action has been the shallowness of the pullbacks. There was one period in late February and early March when the SPDR S&P 500 ETF (SPY) was down eight of nine trading days, but other than that the S&P 500 has not suffered more than two successive down days this year.
Despite the market's remarkable resiliency, the upward progress has been slow at times. Market players have complained about the dullness of the action, but the dips have been bought aggressively and the uptrend has remained in place. There has been some underperformance by small-caps, as represented by the iShares Russell 2000 ETF (IWM) , and certain sectors such as banks, biotechnology, oil and semiconductors have had higher levels of volatility, but overall it has been a very steady and healthy uptrend for more than four months.
On Wednesday the indices sold off late in the day following a very unsurprising interest rate decision from the Federal Reserve. Chairman Jerome Powell reiterated that the Fed was satisfied with current policy and did not expect to make any moves in the near term. Economic growth is solid, employment gains are very strong and, most importantly, inflation is still well below the target area of 2%.
Despite this unremarkable news, selling picked up sharply as the news was digested. The primary reason for the selling wasn't that it was bad news, but that the technical conditions were supportive of a "sell the news" reaction. Market sentiment has become very complacent, good earnings news from Apple Inc. (AAPL) , Facebook Inc. (FB) and others is coming after a big run that priced in much of the positive expectations, and many stocks are technically extended.
The big issue now is whether the bears can build on this intraday reversal. The bears have done a terrible job of producing downside momentum since the skid back in December came to an end. The smart move has to been to jump on the dips quite quickly.
Of course, the bears are telling us that it's different this time. The key argument is that the market's negative reaction to a dovish Fed is a signal that friendly monetary policy already has been discounted. The market is like a crack addict when it comes to cheap money. It simply can't get enough, and when there is not an increased supply then it is disappointed.
The problem that the bears face is that there is no hawkish shift like that which occurred in the fourth quarter last year. The Fed is not shifting its stance. It is still very accommodative, and that will provide some quick support as market players are secure now that Chairman Powell still has their backs.
However, there are a few other negatives brewing. Seasonality is turning negative and this year the old "sell in May" thing actually may be an issue. It hasn't worked in the last couple years ,but technical and fundamental conditions are different now and there is greater potential for at least a pause as the gains in the first four month of the year are consolidated.
Earnings season starts to wind down, but there are still a significant number of small-caps to report. Big-caps no longer will produce that positive drive of earnings that has helped so much lately.
There is also the potential for a China trade deal, but the market has lost some of its optimism over how positive this might be. There are news stories indicating some key provisions may not be implemented. The market may see a boost from a watered-down deal, but it won't be the strong catalyst for which many have hoped.
The bears have an opportunity to build on Wednesday's reversal. They have done a lousy job of taking advantage when they have a chance, but we will see here on Thursday if they are willing to press. As I've indicated, I've raised my cash levels quite a bit lately, primarily as a function of not finding many technical setups I like. I'm happy to be a buyer, but there needs to be some better charts first.
We have a flattish open on the way and the main news seems to be more big initial public offerings that are sucking up liquidity.