U.S. stocks managed to hold up on Thursday. In some cases, they even gave some marginal follow-through buying after Wednesday afternoon’s buying stampede that once again scared the bears back to their caves, at least for the immediate term.
Market breadth was nothing to write home about, nor was volume. Basically, it was a consolidation day after the U-turn in Wednesday’s session.
In the previous Daily Market Outlook, I pointed to three things as favoring a path of least resistance to the upside:
- Seasonal strength in mid- to late August
- A tendency for stocks to rally into monthly options expiration (with the next being on Aug. 21), and
- Overly bearish investor sentiment.
Bearish sentiment has slowly been increasing all year. Bespoke Investment Group said bearish sentiment rose to 36.15% from 31.66%. To yours truly, it’s difficult to see a meaningful correction with this much bearishness — although that could quickly change.
With a summer Friday trading session at hand today, allow me to take a step back and remind you of some of the larger divergences we have witnessed year to date.
On the chart below, I plotted the S&P 500 in blue, the PHLX Semiconductor (SOX) in orange and iShares Dow Jones Transport. Avg. (ETF) (IYT) in red.
While the S&P 500 continues to mosey along in its 4.5% trading range, the transports and semiconductors, both of which tend to lead the market, have topped out and diverged lower. To be sure, this is not an immediate call to sell it all and head for the hills. But it is context with which to take any potential summer-end rally attempt in the broader market.
The banks, as represented by the KBW Nasdaq Bank Index (BKX), have shown relative weakness as a result of the flattening yield curve. This is important to watch as a broad-based and lasting rally for the overall market is difficult to achieve without meaningful participation by the banks. I remain bullish on banks through a six-to-nine-month lens but less so over the next couple of months.
The Russell 2000 dipped further below its 200-day simple moving average (red line). While this is noteworthy, the more important line in the sand for this index is the former horizontal resistance.
Wednesday’s intraday lows are an important near-term inflection point, below which the trap door could open. A bounce back to 1,230 to 1,240 cannot be ruled out before seasonal headwinds may push this index lower again.
Conclusion
Thursday’s consolidation day didn’t damage any of Wednesday’s V-shaped reversal rally. This keeps hopes for a end-of-summer rally alive. I will point out that nine of the past 11 Fridays were indeed down days. Therefore, I do not expect any great fireworks to the upside today and into the weekend.
Today’s Trading Landscape
To see a list of the companies reporting earnings today, click here.
For a list of this week’s economic reports due out, click here.
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As of this writing, Serge did not hold a position in any of the aforementioned securities.
