Positive Price Action Smacks Into a Tough Calendar, Few Catalysts
The technical strength is impressive, but it requires a diet of positive news to sustain the momentum.
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We have a flat start on Monday as investors digest the positive market reaction to a weak jobs report. Bonds have not moved much, likely due to higher oil prices and the ongoing Iran uncertainty.
The strong action on Friday pushed Investor’s Business Daily to raise its recommended exposure again, this time to the 60% to 80% range. IBD’s reasoning is that the Nasdaq and the S&P 500 both marked lows above their 21-day lines for three or more days running. Their advice is to raise exposure at a measured pace and focus on market-leading stocks that clear proper buy points.
That is the third increase in a week from a system that was pinned at 0% to 20% eight sessions ago. The response here is driven purely by improved price action. Fundamentals may not have shifted much, but that doesn’t matter to a timing system that reacts to price movements.
The Battle Between Price and Catalysts
The primary issue the market faces is between price action that keeps improving and a calendar that will offer little. Small cap earnings wrap up this week. Those reports have been the engine behind most of the moves that have been working, and after they finish, company-specific news goes quiet until October. What replaces it is macro headlines, thin volume, and the weakest stretch of the seasonal calendar.
Markets do not need catalysts to go up, and a market with good breadth and improving technical conditions can drift higher on its own for a while. But rallies that lose their news flow tend to lose their conviction, and the second half of August is when Wall Street empties out and the movements get harder to trust in either direction.
There is good reason not to get too exuberant here but, on the other hand, the price action deserves respect and the technical improvement has been impressive. The fuel supply for more upside is the issue.
Where the Action Has Been
The most notable action recently has been in the smaller stocks, driven by good earnings reports. Friday produced over 200 names up more than 10%, against 140 on Thursday. That is where the money is going and it is where the opportunity has been. I’ll be keeping an eye on how many stocks are making 10% upside moves. I expect it to slow substantially as earnings season comes to an end.
The AI trade and the chips have improved but the overhead resistance is still lurking. The semiconductor sector never recovered its 50-day moving average during the bounce, and the names that led the group down in July have a long stretch of trapped shareholders above current prices. Recovering from technical damage like that takes months, not weeks, and does not occur in a straight line.
Game Plan
My focus stays on the smaller-cap names while playing tight defense and being quick to sell anything that lags.
I am not worried about this market running away from me. Much of the positive action we have seen is a consequence of poor positioning rather than any change in the underlying situation, and a weak jobs report is hardly a great catalyst even if it does cut the odds of an immediate rate hike. A market that rallies because traders were caught leaning the wrong way is a market that can reverse just as quickly once everyone is repositioned.
The names that have reported and held their gains are what I want to watch as they consolidate and create favorable chart patterns. Anything that runs up in sympathy without news of its own is the first thing to go when it starts to stall.
At the time of publication, DePorre had no position in any security mentioned.
