"Strategas Research believes performance is likely to be more rotational (money moving from group to group) than broad-based (fresh money lifting all groups)." — Strategas Research
So in last Friday's Morning Tack we wrote:
"So why didn't the stock market crater on the Facebook face-plant? Well, it is because the market's internal energy is in bullish mode into next week where it will turn more neutral. Longer term, however, the market is going much higher."
In yesterday's letter we opined:
"One cautionary note, the market-leading small caps, as defined by the Russell 2000, has broken down and broken below its 50-day moving average, ending its longest such streak ever and the S&P 600 Small Cap A/D line is breaking down, as is the small cap Relative Strength Index, and the Option SKEW Index is flashing red. These changes, accompanied with the breakdown in the FANGs, are suggestive of a change in leadership. Accordingly, we are turning somewhat more cautious on a VERY short-term trading basis for the aforementioned reasons."
We will admit the fact that the overall stock market did not crater on the Facebook hairball suggests that the money coming out of the FANGs is moving into other parts of the market, or as Strategas notes, "A rotational rather than a broad-based (fresh money lifting all groups) rally." We also noted that the stock market's "internal energy" would turn neutral this week, so a VERY short-term trading-top is due.
As for this earnings season, we received this email yesterday, "As you have indicated for several months now, the markets are in an earnings-driven secular bull market. Then how come even when earnings beat to the upside certain equities still 'sell off' or are driven downward. What gives?"
Really? How can you be a financial advisor and ask such a question given what has happened to the FANGs?! We have been stating for some two years, not several months, the secular bull market has transitioned from an interest-rate-driven to an earnings-driven secular bull market. That theme has played in spades!
In point of fact, since our bottom "call" of February 9, 2018, the S&P 500 has gained 12 percent into last week's intraday high, absolutely driven by outstanding earnings reports. So what now? The history of mid-term election years is that stocks become dicey in August, but tend to rally as we approach the mid-term elections. Also worth a mention is that going back decades shows that when the stock market is up in April, May, June and July in mid-term election years, in the two years that has happened (1954 and 1958), after an August Angst moment, stocks have finished the year stronger. As was pointed out to me by a CNBC anchor yesterday, "In those years (1954 and 1958) the Democrats took back Congress, what do you think about that?" We responded that there are 26 Democratic seats up for grabs in the Senate and it is HIGHLY unlikely the Dems can recapture the Senate. The House is another matter, but our contacts in D.C. say the House is up for grabs, despite hoots that the Dems will sweep the House.
Yesterday's action took the SPX down to its 2790-2800 support level and has left the McClellan Oscillator oversold (see chart where green is the oscillator). Still, we would err, at least on a trading basis, for caution into mid-month when the market's internal energy should be rebuilt. Today is the end of July and traders will watch for the BoJ communique on rates and QQE. Also, Eurozone and individual European nations' Q2 GDP could impact early U.S. trading, not to mention Apple's earnings after the close. As we write at 5:37 a.m. the preopening S&P 500 futures are flat.