We have some messy market action on Thursday morning as Microsoft (MSFT) announced a reduction in its second-quarter earnings guidance due primarily to the impact of a stronger U.S. dollar. It is surprising that they are announcing this with nearly a month left in the quarter, but management must expect that conditions will remain difficult for a while.
The action in Microsoft highlights the fact that some key big-cap names have more potential for downside as they have not corrected nearly as much as many other areas of the market. There still is no technical bear market for the S&P 500, but if a few other large-caps have more negative news flow, then it is just a matter of time.
Despite Microsoft's struggles and negative action in the senior indexes, breadth is running around 4,500 gainers to 3,400 decliners, and the Russell 2000 ETF (IWM) is leading with a gain of 0.37%. These are the stocks that have been in decline for over a year, and many of them are showing signs of good support while the bigger-cap names are in a more precarious position. New 12-month lows are still under 100 names, and that is the key thing to watch right now.
Monthly payroll numbers will be released Friday, but the ADP numbers Thursday morning showed a decline in employment at small companies while big companies still have strong employment growth. In a slowing economy, it is small business that suffers first.
The debate over whether we are heading for a recession is intensifying every day. The market is trying to figure out if a slowing economy will help to address the inflation issue, but Fed member Lael Brainard just stated on CNBC that she believes it is unlikely that the Fed will pause rate hikes this fall. Perhaps it will move to quarter-point hikes from a half-point, but there are no clear signs of where inflation is headed at this time.
I've been trading very little. The positions I'm in are holding up well, but I see no compelling reason to put more capital to work right now. This price action is productive, but I do not see conditions for a sustained upside move right now. That may change next week, but I'm focused on reacting rather than anticipating.