The Best Way to Deal With This Market Heading Into Earnings Season
The S&P 500 is trading just under its all-time high of 5767. The other major indexes are lagging a little but are also technically in pretty good shape. Meanwhile, the bulls remain quite optimistic and have embraced a Goldilocks economic narrative in which inflation is not too hot and economic growth is not too cold.
The biggest flaw in the market action now is that upside momentum has been limited. None of the indexes have been making substantial progress, and the Nasdaq 100 (QQQ) and Russell 2000 (IWM) are well below the highs that they hit in July. What's more, the Magnificent Seven stocks are no longer the primary driving force in the market, although Nvidia (NVDA) has had standout performance recently.
The lack of strong positive momentum isn’t necessarily a negative. With valuations and charts of many individual stocks extended, a period of consolidation is needed. And it is healthy that it is occurring in front of the upcoming earnings season.
The bearish spin on this technical action is that it illustrates mixed sentiment and could easily lead to downside action if sentiment about the news flow turns negative. The anticipatory bears expected negative seasonality, which never took hold, and they have also been wrong so far about an economic slowing.
The best way to deal with this market action is to just stay focused on the price action and react as it develops. Trying to guess how this trading range action resolves itself isn’t going to help you very much. As we move into earnings season, we should have a better sense of whether the market can produce another leg higher or if it is time for deeper corrective action.
On Wednesday morning, there is some pressure on Alphabet (GOOGL) due to Department of Justice recommendatious about potential scenarios for breaking up the search engine giant. Also, China is weak for a second day as concerns build about how effective the massive stimulus action will be.
CPI will be reported on Thursday morning, and there will be some positioning moves in front of that news. The kickoff of earnings season comes Friday morning, and that will be the main focus over the next few weeks.
My primary job right now is to manage positions tightly while continuing the hunt for good technical setups. Stock picking has been challenging lately since it's hard to find situations where upside moves should be sustained.
At the time of publication, Rev Shark was long NVDA.