The market has been sending mixed signals as earnings season progresses, but it was a better-than-expected GDP report on Friday that caught the market by surprise. There have been some very good reports from the likes of Microsoft Corp. (MSFT) and Facebook Inc. (FB) and some very poor reports from the likes of 3M Co. (MMM) and Intel Corp. (INTC) that have caused some concerns about the market, but on Friday 3.2% economic growth triggered very strong breadth and outperformance by small-caps.
The big issue now is whether the market can build on this positive surprise. The bears were loudly pointing out the flaws in the GDP report and there are hundreds of additional earnings reports this week. Alphabet Inc. (GOOGL) , which reports after the close here on Monday, and Apple Inc. (AAPL) , which reports Tuesday night, will be of particular interest.
Although the senior indices are hovering near all-time highs there have been some issues with the price action. Many stocks are extended and momentum has been difficult, but the big positive is that there continues to be very strong underlying support. Every dip is bought and there continues to be strong closes, which is a sign of healthy demand.
It is easy to formulate an argument for why this market is about to put in a top. We even have the "sell in May and go away" dynamic hitting this week. That hasn't worked at all in recent years, but seasonality is tendency and not a certainly. If there is some softening in the price action it could feed on itself as concern builds that the old adage actually may matter for a change.
In navigating this market the most important issue remains the price action of individual stocks. That is the canary in the coal mine that will tell us when there are some problems developing. In addition, a shift in the aggressiveness of the dip buying and some weak closes would be clues that more caution is warranted.
The bears tell us that complacency is extremely high and that is a worry, but the last couple rallies in this market were caused primarily by poor positioning. The bears have been anticipating a turn and when we have a positive such as the GDP data on Friday, they must scramble to reposition.
One thing we will need to watch for this week is news on progress on China trade talks. We haven't had much action on this issue lately but it is going to heat up again soon.
Technically the indices are extended but still clearly in an uptrend. I'm very cautiously bullish and will stay focused on action in individual stocks. Any weakness will be dealt with quickly with some selling.
We have a slightly negative open on the way, but it looks like a sleepy Monday morning.