The indices celebrated some easing in the trade war with China on Tuesday, but the big issue now is whether bulls can build on the bounce.
Early indications this morning are negative, primarily due to poor economic news in Europe. Germany had negative economic growth in the second quarter and European industrial production dropped 1.6% in June.
In addition to the signs of economic difficulty, Hong Kong continues to deal with growing unrest -- but the real problem is the bond market. The US 2-year/10-year yield curve inverted for the first time since 2007 and the 30-year bond yield has fallen to 2.08%.
The celebration of lower interest rates that has driven the market for so long now looks like a rush to safety. The failure of the indices to rally on growing dovish central banks is the most worrisome aspect of the current market.
Conditions for some follow-through buying today were good, but the negative news flow is offsetting the favorable technical pattern this morning. If yesterday's bounce immediately fails, that will be a major negative for the market. Downtrends are comprised of failed bounces -- and the faster bounces fail the more negative sentiment will become.
My game plan recently has been to raise cash and stay highly selective with new buys. I was looking for another opportunity to short indices, but was looking for more upside today to help provide an entry point. The negative news flow has undermined that strategy for now. I'm holding over 70% cash at this point, which is comfortable but a little additional index short would be nice.
Investors Business Daily moved its market view back to "confirmed uptrend" last night. This is a mechanical system that is based solely on technical conditions. The bounce in the Nasdaq on higher volume was a technical follow-through day, which triggered the change in the market outlook.
This is a good illustration of how technical conditions are not always predictive. While the framework suggests that the path of least resistance is to the upside, it doesn't account for the economic news that is hitting this morning.
We'll see if some underlying support kicks in. Some give back won't kill the nascent bounce, but if the selling is too intense, it will nullify yesterday's accumulation day.
We are in an index-driven market right now, which makes individual stock picking more difficult. The good news is that this volatility will lead to more opportunities. We just have to stay vigilant and wait for the right setups.