Before I start today’s morning missive, allow me to once again thank Sam Collins for allowing me to pitch in during the past two weeks. It has been both a pleasure and an honor to share my daily morning thoughts with his loyal audience. If you have questions about my approach to trading the markets, please feel free to email me at firstname.lastname@example.org.
Drum-roll, please: By the time U.S. equity markets open today, the big July jobs report will have already come across the wire, and economists will have taken the number apart, flipped it around, and scrubbed it as appropriate.
While that’s a necessary ritual, I will offer that the only thing that matters is how stocks react once the bell goes “ding!” at 9:30 a.m.
Yesterday’s price action speaks for itself — a pop and a close for the S&P 500 above the 1700 mark to a brand-spanking-new all-time high, thus invalidating Wednesday’s weak close in one swoop. Price action does trump all other indicators, but I again need to point out the waning momentum as displayed by the oscillators such as the MACD. While my portfolio currently is defensively postured, allow me to clarify that I don’t perceive this price action nor the slowing upside momentum to be an all-out “sell” signal.
What I am trying to relay is that, historically speaking, given the duration of the rally and the still-growing negative divergences between market internals and momentum in the major U.S. indices, the risk of a mean-reversion move lower is rising by the day. Long-side trading opportunities continue to work, and I have been playing them as well, but from where I stand, a more cautious approach at this juncture is warranted — at least until the slope of the charts come back to more historic norms.
What fueled yesterday’s rally? Better-than-expected economic news? First-of-the-month fund inflows? Likely a combination of both, sprinkled with a “healthy” dose of performance anxiety on the part of fund managers that missed the boat on the year-to-date marathon. For the medium-term, the front-and-center question in my mind remains, “How long will the S&P 500 last above the 1700 mark?”
On Tuesday, I showed a chart of the iShares Transportation Average ETF (IYT), offering that while no longer the best leading indicator, the transports still could give us some clues as to the broader direction of the tape if trader self-reinforcement were to take place.
With yesterday’s move, the transports spiked to a new year-to-date high, throwing any near-term negative divergence vs. the broader market (which they showed last week) out the window. Here too, however, momentum still is sloping down and thus should not be ignored, though a significant bearish reversal in price would be needed to throw the bulls some heat.
Good luck out there, trade ’em well, and remember that at its core, the stock market is about human emotions and perception of value.
Today’s Trading Landscape
For a list of this week’s economic reports due out, click here.