Over the past two weeks the indices have remained overbought and near all-time highs. There has been some consolidation but it has been mild. There have even been some good excuses for a deeper pullback, such as difficulties finalizing a China trade deal and a less dovish Fed.
We start the week with some selling pressure as China trade issues hit the headlines again. There are reports that the Phase One deal may not be concluded this year and that there is disagreement over the rollback of planned tariffs.
In addition to China news, violence has increased in Hong Kong and the impeachment drama is set to increase as public hearings take place. The market has shown complete indifference to these matters, but they do provide some additional justifications if the selling pressure starts to pick up.
Market players have seen the same pattern in the China trade negotiations so often that they have grown immune to the impact of any negative news. Every time there is bad news, it is followed by reports of positive progress and the indices rally even more. That is a big part of the reason why the indices are hovering at all-time highs.
The biggest challenge we are facing in the market right now is that it is mostly index-driven while stock picking is very poor. My weekend column discusses how this phenomenon has developed over the past decade. Because of the dominance of ETFs and computer algorithms the markets are often driven by a few big stocks while most individual stocks languish.
We have a good example of an index-driven market right now. While the indices are hovering around all-time highs, about 45% of all stocks are trading below their 200-day simple moving averages. That is, more than half the market isn't even close to being technically positive.
This market has presented a dilemma for both bulls and bears. The bears have been unable to time a top in the indices and the bulls are finding individual stock picking to be extremely challenging. Probably the best way for these issues to cure themselves is for the indices to correct and more accurately reflect what is going on with the majority of stocks, but that does not come without some pain.
We have a weak open on the way but the bulls are conditioned to buy a dip on China trade news. There isn't much other news flow of interest, but this market has stayed very sticky to the upside.
My cash levels have grown quite high as I've not been able to find many new buys. I will continue to hunt for some new inventory but it is going to take some time for charts to develop. The bears are still predicting a market collapse, but there are no signs of that at this point.