The arguments for why this market should see some corrective action have seldom been as compelling as they are now.
At the top of the list is the spike in Covid-19 cases, which is slowing down the reopening of the economy. There are also concerns about economic data, the coming earnings season, and valuations. The disconnect between value and growth has seldom been wider and the outperformance of the Nasdaq over the Dow Jones Industrial Average (DJIA) is causing consternation among market timers. On Thursday the DJIA looked quite poor with a loss of 1.4%, while the Nasdaq was frisky with a gain of 1.4%.
The challenge for market timers is that this has been a market of stocks rather than a monolithic stock market. There has been exception strength in FAANG names and some big-cap momentum stocks. In addition, there are the pockets of momentum in small speculative stocks that is attracting small, aggressive traders. Precious metals also have been rewarding the bulls.
If you focus on the pockets of strength, the market looks very different than if you look at the DJIA and sectors such as financials, as seen in the Financial Select Sector SPDR (XLF) and industrials, as seen in the Industrial Select Sector SPDR (XLI) .
The question for aggressive market players is two-fold. First, will the pockets of momentum continue? Typically, traders keep pursuing these sorts of trades until they stop working. That can take longer than many think and may not be impacted much by the direction of the indices.
The second question is overall market direction. The timers have been trying to nail a turn for a while but are unable to gain any downside momentum. Twice in the last two days intraday reversals to the downside have occurred, but buyers stepped up and prevented any real pressure from building.
While there are some very good safe havens for the bulls, the price action is narrowing and there are more attempts at downside. The negative headlines will not relent and they create the impression that the rising stock market is totally unjustified. Ironically, the negative news flow is part of the reason that the market continues higher. It is a "climb a wall of worry" dynamic and there is no shortage of worries or cash on the sidelines to keep it going.
There are plenty of flaws in this market, but so far the price action has not cracked. We need to stay vigilant and keep watching for intensification in the warning signs.
It is tricky, but what is working is a mix of aggressive trading coupled with a strong defense. While those seem to be conflicting activities, it is not impossible and I'll be discussing that more fully this weekend.
Futures are already bouncing back but buyers do not look as confident.