A week ago the indices dropped sharply as the trade war between the U.S. and China escalated. After a one-day drop that did some severe technical damage, the indices shrugged off the worries and moved steadily higher over the next three days. On Friday some worries about trade took hold again and the indices sold off in the morning, bounced intraday and closed weak.
Here on Monday morning concerns about fallout of the U.S. ban of Chinese telecom giant Huawei Technologies is hitting the market. Intel Corp. (INTC) , Qualcomm Inc. (QCOM) and others are sending out intra-company statements about cutting supply to Huawei, which is hitting the technology sector quite hard this morning.
The restrictions on sales to Huawei aren't new news, but the market seems to be slow in reacting to some of the recent trade news. It is quite evident that this fight is going to continue for months but the market reaction has been quite sanguine.
There was no follow through to the selling that hit last Monday and there has been strong buying interest in reaction to overnight selling. Last week most of the losses occurred overnight and most of the gains during the trading day, which is primarily a function of the computer algorithms and other trading activity that is based on price action rather than news flow.
The big question this week is whether the indices can continue to hold above the low hit last Monday. That is the key technical level that everyone is watching. For the S&P 500 that level is right around 2800. The key overhead level is the 50-day simple moving average around 2868. That is a fairly big range and for now the best way to proceed is to treat it as a trading range rather than a trending market.
Last Tuesday, Investor's Business Daily changed its market view to "correction," but that was mitigated to a large degree by a V-shaped bounce that left the indices close to unchanged for the week. There is some significant overhead resistance now and the news flow is quite problematic. On top of that there is negative seasonality to deal with.
This market is not in very good shape technically, but more significantly it is dancing around to news flow. Trade headlines, Fed speakers and a number of earnings reports from retailers are on the docket. Both bulls and bears have some good arguments and I'm looking for choppy and inconsistent market action.
I'm holding very heavy cash and an index short as we start the week. I'm likely to cover my short into this open, but the biggest difficulty I see right now is the lack of setups in individual stocks. There simply is not much leadership or momentum for traders to embrace. The bounce last week prevented some damage to stocks, but it didn't do much as far as creating new buying setups.
My game plan is to stick with high cash for now but stay vigilant and keep hunting for some new entry points. There isn't much on my shopping list, but with pressure like we have her e on Monday morning there should be some things of interest developing.
It is a tough market environment right now, but if you are positioned with a good supply of cash then you can be optimistic about finding some good opportunities.