On Monday the market suffered its first real bout of selling since January. A late recovery prevented much damage from being done to the indices, but profit taking hit a number of leading groups, such as cloud computing and software. The Innovator IBD 50 ETF (FFTY) , which is comprised primarily of bigger-cap, momentum names, fell 1.3%, but the Nasdaq 100 ETF (QQQ) , which is mostly driven by the FAANG names -- Facebook (FB) , Amazon (AMZN) , Apple (AAPL) , Netflix (NFLX) and Alphabet/Google (GOOG) , (GOOGL) -- managed a small gain.
It was a shift in the recent action and was particularly notable as it occurred on headlines that China and the U.S. were close to a deal on trade. The market has rallied on the same news many time in the past few months, but this time there was a "sell the news" reaction to the headlines, which was a shift in market character.
It is premature to read too much into this action at this point. Many stocks have become technically extended and some profit taking is healthy. It will allow for some new support to form and set charts up for another leg higher.
In addition, China trade news will continue to be a catalyst as a deal becomes more likely. It is still very tough for the bears to push too hard when there could be a headline at any time that an actual deal has been made. That may produce a "sell the news" reaction again, like it did on Monday, but the potential for upside first is very high.
The bears' main focus going forward will be on economic weakness around the world. China made a number of economic moves and cut its growth forecast. Slowing growth out of Europe is also expected, but so far that narrative has not become a market driver. With the Fed now clearly taking a more-accommodative stance, the market is not fearing economic weakness at this point.
While the profit taking in some of the best-performing momentum stocks on Monday may have required some defensive moves, the selling did not rise to the level of changing the overall market trend. It looked like a pause within a general uptrend, rather than the start of a major shift.
That dynamic can change quickly, and we will have to watch positions carefully, but anticipatory bearishness continues to be the tough trade. Stay focused on positions and keep stops fairly tight, but don't be too quick to buy into what the bears are promoting. The market action is still quite healthy and one day of selling in high-momentum names doesn't change that.
We have a slightly positive open on the way, with a good response to earnings from Target (TGT) helping the cause.