Stubborn Market Refuses to Quit, Pessimists Notwithstanding

Overbought technical conditions, negative seasonality and the likelihood that tariffs will be imposed on Chinese goods this week are not stopping the indices.

Both the S&P 500 and the Dow Jones Industrial Average (DJIA) enjoyed five straight days of gains last week and are sitting close to all-time highs. The negative narratives continue to be loudly broadcast by the bears but the market isn't embracing them. The positive price action is preventing market players from embracing the pessimistic arguments that are quite logical, compelling and easy to make.

While there is positive action in the senior indices, there has been weaker action under the surface. The most obvious illustration of this dichotomy was the high level of stocks hitting new 12-month highs during the past week. A week ago there were more new highs than lows, which is surprising given how close the indices are to all-time highs.

The thing that is going on in the indices is a high level of rotation. Almost all the corrections in the market in recent years have been hidden to a great degree by this rotational action. The weakness in groups such as banks or semiconductors is offset by strength in groups such as retail and oil. In addition, there are a few big-caps such as Apple Inc. (AAPL) and Amazon.com Inc. (AMZN) that help to prop up the indices as well.

It is tough to use the indices are accurate gauges of overall market health these days. The DJIA in particular does not reflect what is going on with much of the market. The business media focus almost exclusively on indices and don't really concern themselves with the health of the broad market. If the DJIA and S&P 500 are up, then it's a healthy market and that is the end of the story.

So far September has been a tougher trading market than August. In August there was a very big supply of smaller-caps acting well, and some of the more speculative groups such as biotechnology did particularly well. There still are some stocks making strong moves, but the market is much narrower now and increasingly choppy. The follow-through is much harder to find.

The pot stocks are a good illustration of what is going on with speculative trading. Most have become extended but traders keep trying to find something to chase and therefore keep bids under them. It is a very small group of stocks but they help to keep the speculative juices flowing, although even that group is narrowing.

The big question this week is whether the trade war with China finally will matter. The market consistently has shrugged off the predictions that the trade war will hurt the market, but actual tariffs are likely to start this week and there is no doubt China will retaliate.

Traders have been conditioned to buy any and all weakness on trade headline, but what we need to watch for is a shift in this behavior. The trade wars are going to drag out for a while and at some point market players are very likely to grow tired of the games. So far that isn't happening, but the longer this continues the greater the chances.

We have a market with many good reasons to pull back, but It refused to do so. Stay focused on the price action rather than the headlines.

At the time of publication, Rev Shark had no positions in the stocks mentioned.