Market players looking for Tuesday's strong action to continue were disappointed Wednesday, but no technical damage was done. Breadth was close to flat with small caps leading and the big cap technology names that comprise the Nasdaq 100 (QQQ) lagging.
The biggest negative was that there was rotation out of the leading momentum stocks again. The group was hit hard on Sept. 9 and 10, as money rotated into value names. The Innovator IBD 50 exchange-traded fund (FFTY) lost around 4.7% on those two days. The drop Wednesday wasn't nearly as bad at around 1.2%, but it illustrates how there is still fear of chasing the more expensive names. With many of these companies reporting earnings soon, it will be a very important theme to watch.
Netflix (NFLX) is reporting Wednesday night and is seeing a positive initial response. It has slower growth, but better margins. The stock has been struggling for a while and there is likely to be some "sell the news" pressure, but the bears may be leaning too hard given the increased competition in the streaming market. Netflix is gaining upside traction now as the numbers are digested, which bodes well for momentum names.
IBM (IBM) also reported, and is seeing a negative initial reaction on mostly inline numbers. IBM has been a serial disappointment and needs better numbers than this to attract interest. IBM will hurt the Dow Jones industrial average, but it is not a stock that tends to have a broad market impact.
The market action Wednesday was not technically significant. It will be the reaction to earnings reports that determines where this market is heading. There is pent up demand for stock selection, and the rotation action in momentum stocks is feeding that. Netflix is gaining momentum now and that is a good sign for the broader market.
Have a good evening. I'll see you Thursday.
