Stocks and indices are on a five-day winning streak, but momentum has slowed as market participants look ahead to the Jackson Hole conference that takes place on Friday. The Fed has announced significant decisions at this conference in the past, and there is always some anticipation of market-moving news.
The market action doesn't seem to indicate any great concern that the Fed will announce an abrupt hawkish shift, but conditions are ripe for finding some sort of negative news to justify a pullback. This is a typical "sell the news" setup, although quite often, the situation will just serve as an excuse for some healthy technical consolidation. At this point, a pause or softness in the action should not be too surprising.
Despite the fact that the indices have stayed on their steady trek higher and haven't reflected any major changes, there has been a significant change in market character under the surface. Many of the stocks that have been in bear markets and downtrends since hitting highs in February have found solid lows and bounced strongly. While they may be a bit extended now, this is the best bottoming action we have seen in groups such as biotechnology, gambling, growth stocks, and speculative small-caps.
While it is possible this is just another short-lived bounce in secondary stocks, the nature of the action has been different. It has been more persistent, volume patterns have been better, and it looks like there is better and more sustained technical action.
The best thing that could happen for small-caps at this point is some consolidation of gains as the news from Jackson Hole is digested. What is key is that the lows from last Thursday hold. On Wednesday, there were only 52 stocks hitting new 12-month lows, which is a nice shift from last week. There were 527 new 12-month highs, which is not insignificant, but not nearly the level that occurs in very frothy markets that are hitting new all-time highs.
This has been a narrow, two-tiered market for quite a while, but there has been a shift over the last five days.
Be ready for some pause in the action, but much of the market is just starting to rally after months of misery, and conditions look good for a continuation. The extended and misleading indices complicate the situation, but the majority of stocks are in good shape. It is only some of the mega-cap names that extended, but they attract much bearish commentary from market timers.
We have very quiet action in the early going Thursday. Cryptocurrencies are under pressure for a second day, and speculative action in meme names has slowed abruptly.