After a 10-day run of higher closes than opens, the S&P 500 is set to gap up this morning. There is disappointing news from Netflix (NFLX) , American Express (NFLX) and Tesla (TSLA) , but the bulls are encouraged by what appears to be some false rumors on progress with China on trade.
Thursday afternoon, the Wall Street Journal reported that the U.S. might forego the implementation of tariffs on Chinese goods as a show of good faith and to help accelerate negotiations. That produced a a quick and sizable spike, but it was given back to a large degree when senior administration officials said they were puzzled by the story.
Nonetheless, this story about China trade negotiations has helped to create a positive expectancy and market players are anxious to stay in front of the news. They saw how quickly this market reacted yesterday to the WSJ article and they are fearful of being on the wrong side of some news that does prove to be true.
The dilemma of this market is obvious. The indices and most stocks are now technically extended and running into technical overhead, but momentum is strong and there is the potential of positive news on either trade or the government shutdown at some point.
So far, earnings season has been a mixed bag, with Goldman Sachs (GS) being the standout to the upside, but a number of disappoints so far. Next week, the pace of earnings picks up and we'll hear from many technology companies that will provide a very different take on how the economy is doing as it grapples with trade issues.
Like many others, I am having a very hard time putting cash to work in individual stocks that have been running straight up. It just isn't my style to chase at this point. On the other hand, it has been even more difficult to try to play anything to the short side. The momentum is creating short squeezes and the fear of missing out is bringing in a steady supply of buyers.
My approach on a short-side trade is to not be aggressive until the pattern of positive action shifts. We have now had 10 days in a row of intraday strength. It may not seem reasonable, but that can easily continue longer than we might think. I want to see some actual weakness before I try to catch some downside.
Traders have a strong tendency to try to anticipate market turns rather than to react to them after they occur. Computer algorithms tend to do the exact opposite, which is why these trends tend to last longer than many think they will. The computers can move much faster than poor humans, so they don't worry as much about trying to anticipate. I'll have more on this in my weekend column.
We have a gap-up open and some poor earnings news -- and once again the bears are on the run as they keep trying to guess when a turn will occur.
