Indexes Are Holding Up, but Market Conditions Are Deteriorating
Late-day rallies have bailed out the market the last two trading sessions. But here's the biggest problem we face right now.
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The major stock market indexes continue to hold up fairly well, but conditions under the surface are deteriorating, and the risk of corrective action is building.
The market has been bailed out by late-day rallies in the last two trading sessions. This is likely due to positioning by pension plans and large funds at the end of the month and the start of a new one. While these reallocations don’t tell us much about market sentiment, they are very sizable and have a short-term impact on the indexes.
The biggest problem the market faces right now is growing concern about the health of the economy. This has boosted bonds, and the iShares 20+ Year Treasury Bond Fund TLT is indicated to be higher for the fourth straight day. When economic worries increase, money rotates into the safety of bonds, as that is what is happening now.
The JOLTS Job Opening Report is due out at 10 am ET on Tuesday morning, which will likely have some impact on sentiment. The monthly jobs report is due on Friday. The ISM Manufacturing Index on Monday was soft, and that is part of the reason that bonds rallied.
Bullish market participants are hopeful that signs of economic slowing will push the Fed to start cutting rates earlier rather than later, but there is no indication of that happening at this point. Fed members continue to indicate that they will watch data carefully and do not feel any pressing need to cut rates. If there are more poor economic reports, that could change fast, but by that time, the economy will already be on a downtrend.
Under the surface of the indexes, there has been very choppy action recently. I’ve been happy about some good stock picking in small-caps, but the theme has been a bit narrow, and the surge in meme trading reflects that some traders are taking on excessive risk as they look for fast profits.
Although big-cap technology names have been lagging, they showed some relative strength on Tuesday as Nvidia NVDA cemented its role as a safe haven when the overall market looks nervous.
I’m concerned about overall market health and will tighten up stops and be a little more aggressive at raising my cash position.
At the time of publication, Rev Shark had no positions in any securities mentioned.
