Momentum Fizzles After 2 Big Days, but Here’s What Indexes Didn’t Show
There was still plenty of speculative action in small stocks, but the indexes needed a rest.
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After two strong trend days with positive breadth, the momentum fizzled out on Wednesday. The high of the day came shortly after the open and the indexes closed near the lows. The Nasdaq 100 (QQQ) was the laggard with a decline of 0.7% and breadth fell to 41% positive.
That is a very different session from the two that preceded it. Monday and Tuesday saw steady advances with no meaningful pullbacks and closes at the highs. Wednesday inverted the pattern.
The Reversal Was Predictable
After two days of FOMO chasing, some profit-taking and reversal action is not surprising. Traders who bought aggressively into the strength had gains to protect and no reason to wait.
As is typical at these junctures, the dip buyers tried early in the day and then quickly gave up when things did not turn. In a market with genuine underlying strength, the buyers who step in on a morning dip stay engaged and the market recovers into the close. When they abandon the effort within the first hour, it tells us the bid is less confident than the previous two sessions suggested.
There Was Still Plenty Working
As is usually the case, the senior indexes do not capture what happened underneath. There was still a long list of stocks moving up more than 10%.
Some of that came from small-cap earnings reports, which are now arriving in volume and producing exactly the volatile action I have been expecting. There was also strength in gold and the mining names, which moved a number of stocks.
This two-tiered action is the dynamic to watch. The indexes had an ugly reversal while a meaningful number of individual stocks had strong days. Anyone watching only the index level got a worse read on the session than the market actually delivered.
The Backdrop
Oil was down and bonds were higher, and neither helped much. There continues to be a great deal of uncertainty about the Iran situation, with the two sides describing entirely different states of negotiation.
We do not have much major news flow on the docket from here, and we are heading into peak vacation season on Wall Street in the second half of August. That combination typically produces thinner volume and moves that are harder to trust in either direction.
Game Plan
My best advice is to protect gains and stay patient with entry points.
The earnings reports are producing new names for the shopping list, but most of them do not require immediate action. A stock that just reported well and gapped higher will give you a better entry in a week or two than it will tomorrow morning. Those that trade lower but still have solid fundamentals will need time to consolidate.
I have been adjusting positions that have had good runs and trimming a bit where earnings reports are coming. The goal is to keep accounts as close to their highs as possible while the market sorts out whether the past two days were the start of something or a burst of repositioning that has run its course.
Have a good evening. I’ll see you Thursday.
At the time of publication, Rev Shark had no positions in any securities mentioned.
