After a Wednesday to Friday rally last week, stocks went nowhere on the session. That in itself is something of a victory as stocks were quite sluggish and back and forth on the session. Instead of selling off after a low volume, weak breadth move, they held their position, consolidating in place.
SP500 -0.13, -0.01%
NASDAQ 1.96, 0.03%
DJ30 -8.02 -0.04%
SP400 0.16%
RUTX 0.19%
SOX -0.43%
NASDAQ 100 0.03%
VOLUME: NYSE +2%, NASDAQ -4%. Up as NYSE large cap indices were down, down as NASDAQ and growth were up. Not the volume action you want to see, but then again, with volume this low, does it matter? Apparently not.
Advance/Decline: NYSE 1.3:1 NYSE, 1.1:1 NASDAQ. Matched the session.
Painfully low volume, narrow breadth, bumping at highs (indeed, RUTX put in a nominal new high), and no selling. Those are the constants in the market.
Also constant: despite no major volume, there are leadership stocks. Stocks rallying after breakouts, stocks testing breakouts, stocks setting up for breakouts. In the lack of sellers, it does not take much volume to establish patterns that break higher. What looked to be serious selling setting up, selling that occurred on stronger volume, was again blunted. Two weeks back SOX was diving lower but was saved. Ditto NASDAQ. Not a massive bid, but when the sellers took a break, persistent bids appeared and the sellers gave up selling. This scenario has occurred many times, many times, in this market move.
After several days upside, Monday was a rest session, but as noted, even resting the indices held quite steady.
NEWS/ECONOMY
More disappointing economic news. Outside the jobs report and its incredible lack of believability, the hard data for several months now has softened. Now the sentiment survey data is falling as well. Last week saw sentiment fade unexpectedly and sharply. Monday saw manufacturing sentiment continue its recent slide.
Empire PMI, July: 9.8 versus 13.0 expected versus 19.8 June.
Lowest New York PMI in 8 months (November 2016). Now the soft, sentiment data is falling as well. The exuberance that held up so well since the election is falling. Now sentiment is tricky in itself in terms of meaning; it typically only has meaning, at least in terms of market turns, when it is very high or very low. It is not necessarily blowing out the top of the range. BUT, it is high relative to the level of economic activity. In other words, the two are in divergence, and as we say often, divergences ultimately always converge.
If they do converge in the direction the hard data has moved, that suggests economic weakness. Oh, but FOMC as Yellen noted last week has already changed its view to 50/50 growth versus slowing. As noted over the weekend, bad is good again, so the weaker PMI indicates the economy is still weaker, and for the market that is good.
Bad equals good AND good equals good.
It is not, however, just bad equals good. Good equals good as well. The FOMC is confused but still more than willing to stand behind markets versus any risk of falling, at least that is what Yellen's testimony last week appeared to reiterate. So, with the Fed confused, bad is good AND good is good.
What kind of rotation?
With that combination, the downside at this juncture appears to have suffered defeat again. Now it is just a matter of what rotation decides to show up again: the virtuous rotation where new areas rise while the rally's prior leaders just rest, OR the more vicious rotation where new areas rise as money is pulled from the prior leaders, leaving those prior leaders heading lower?
Monday showed signs at one point of the latter, the vicious rotation, but then it straightened up and the laggards recovered to flattish along with the rest of the market. Thus the market will still need to show us what rotation it is going to employ, but the action Monday at the least gave the market a reprieve from sectors falling.
The index charts held steady, RUTX cracking higher for another new high. Everything else just paused in place. A day of rest on light volume, weak breadth. With the lack of sellers, an upside bias remains, even if it does cool some.
Afterhours NFLX beat on earnings, but it was the unexpected number of new subscribers and strong guidance that shot it higher. It would appear the run into earnings did not yield a selloff when rumor became news. We will see if that gins up more of the market, or if it is just another NFLX-specific story.
We picked up some HTHT as it showed a bold break higher. Also grabbed some COHU as it shot higher on volume. YY Gapped and rallied early, and it ran to the initial target. We banked some solid gain as per the plan, and now let the rest of the position work to see if it can score some really big returns for us. Oh yes, and we will see if this upside bias continues jumping other stocks higher toward earnings as well.
Have a great evening!
Jon Johnson, Chief Market Strategist
InvestmentHouse.com
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