Market Alert - The Close

Monday was down, Tuesday was up, so I guess it was no surprise that the market opened sharply lower Wednesday following late night Chinese 'retaliation' tariff proposals in response to the Trump tariff proposals. Operative word: proposals. There are commentary periods (even for the Chinese proposals) and then a long approval process. There are also, as Larry Kudlow reminded everyone this afternoon, ongoing 'backdoor' negotiations in progress. Recall it was said just a week ago that there were promising talks ongoing despite the initial tariff proposals by both the US and China. That has not changed. Moreover, nothing that transpired in the past 24 hours was a surprise; it was all telegraphed. Reality versus theory, however, is always a slap in the face, and the market reacted thusly.

Futures tanked with DJ -500, NASDAQ -110+, SP500 -40. Stocks opened lower, and despite what was said about Kudlow spurring a rally after he spoke around noon ET, stocks were coming off the lows from the open. They spent the entire day rising with just a midday modest dip just before Kudlow took to the airwaves. DJ30 swung 750+ points from low to close. NASDAQ 230+ points. Impressive. Crazily so.

SP500 30.24, 1.16%
NASDAQ 100.83, 1.45%
DJ30 230.94, 0.96%
SP400 0.88%
RUTX 1.29%
SOX 1.30%
NASDAQ 100 1.57%

VOLUME: NYSE -3.5%, NASD -3.5%. Another upside day where volume failed to really ignite. Tuesday internals were weak on the upside and Wednesday they were even weaker. There is no massive surging into stocks as both NASDAQ and NYSE volume slipped lower below average.

ADVANCE/DECLINE: NYSE +2.2:1, NASDAQ +2.9:1. Be still my heart.

To recap: Stocks open lower on 'new' trade war worries. From the open, however, prices started to recover. DJ30, SP500 held over the February lows. NASDAQ gapped to the Monday low, held over the 200 day SMA again, held just over the February closing low again, then rebounded to close over the trendline from early 2016. SOX gapped lower, held over the February lows, rebounded to hold the channel trendline. SP400 and RUTX both held the 200 day SMA and bounced as well. Been here before, namely for the past 8 sessions.

The internals were again disappointing. Even lower volume than the Tuesday lower upside volume. Breadth was better on NASDAQ as some money flowed back to that beaten down sector, but it was lower on NYSE. Bigger picture, the internals remain quite weak as again the indices attempt to break higher off the same support. The picture looks pretty but the foundation is not that great.

Leadership showed improvement. Not all well positions stocks hit buy points, but many leaders from across several sectors posted higher volume upside. AKAM, MU, NFLX, SCHN, CRM, PANW, VCEL, MRO. Perhaps we should have entered PANW; it enjoyed a late volume jump. We should have entered FND; it jumped early and we waited for a pullback. Didn't. Perhaps it gives some back early Thursday. Others perhaps were light on trade but look good, e.g. Z, STX, TRIP, NTNX, M. In sum, leadership was a definite improvement, and as you know a rally MUST have solid leadership.

Thus, there was more of the same, i.e. low volume and mediocre breadth as the indices hold support and try to advance, and there was of course huge volatility. On the other hand, there was some serious low to high movement and much better leadership action. Some improvement, the prospect of a break higher, but for now still in the process of trying to set a bottom at the prior lows and then work higher off that bottom. Looks better, but still a work in progress.

It was enough for us to pick up some positions, e.g. AMED, MU, TJX. As noted, we probably should have grabbed FND and PANW. They are not out of range, and we typically get a bit of a dip after good surges. So, perhaps Thursday opens a bit softer and then more low to high action. That would present an opportunity on these two stocks as well as others.

The ability to generate a new upside move is still there. The technical setup is the most obvious. A strong economy is also there despite the recent fretting obsession with tariffs on 0.3% of the US economy.

The REAL issue is the leadership. Toward the end of the last leg higher, before the February dips, FAANG was dominant. FAANG, or at least a few of the names in the group, appears to have lost leadership ability. Indeed, there appears to be a leadership shift in progress. Some old names look solid, e.g. MU, AKAM, CRM, HLF. New names are looking interesting in materials, healthcare, retail, even some oil. Over the next few sessions we will see if they can take charge. Some are trying right now and we will continue watching them and be ready to enter.

Have a great evening!
Jon Johnson, Chief Market Strategist
InvestmentHouse.com
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