Split Tape, Stocks Weaken
The market slid last week and tested the 50 day moving average (near-term support) as it paused to consolidate the recent rally over the past few weeks. The Nasdaq, Nasdaq 100, Dow Transports, and small-cap Russell 2000 closed below their respective 50 DMA lines while the S&P 500, Dow Jones Industrial Average, and the mid-cap S&P 400 index are still above their respective 50 DMA lines. That is a great example of a split tape. Stepping back, it is perfectly normal and healthy to see the market pause after it flirts with resistance (record highs). Remember, a few weeks ago the market was trading near its record high (resistance). So the fact that it is pulling back now to digest that move is perfectly normal. The bulls want to see a light volume and orderly pullback into support, not a break of support. So, if more indices break, then the tape will weaken and odds favor more sloppy/lower action will follow. The bulls must defend the 50 DMA line in order to send stocks higher. If they fail to do that and the other indices break below their respective 50 DMA lines, we should expect more sideways/sloppy action to continue. Underneath the surface, the action has deteriorated and the Find Leading Stocks portfolio has raised some cash in recent weeks and locked in some nice gains along the way.
Stocks were quiet on Monday as the market traded between positive and negative territory. Some negative economic data in Europe spooked investors early in the session but buyers showed up in the second half of the day. Germany said its manufacturing activity slid to its lowest level since the financial crisis. Germany also said its services sector grew at its slowest pace in nine months. A separate report showed that manufacturing in the entire euro zone slid to its lowest level in over six-years while services grew at is slowest pace in eight months. Stocks opened higher but closed lower as sellers dominated the tape. The Nasdaq fell for a third straight day as a slew of tech stocks dragged the market lower. In other news, the democrats started a process to impeach President Trump. Separately, he gave his third speech to the General Assembly at the United Nations on Tuesday. On Wednesday, stocks rallied after Trump released the transcript of his call with Ukrainian PM when he asked him to look into Joe Biden and his son. In other news, new homes sales jumped nicely.
Thursday & Friday Action:
Stocks slid on Thursday after more developments came regarding the whistle blower compliant against President Trump. Separately, Peloton, the latest tech unicorn, IPO’d and the shares slid a little on the first day of trading. Stocks slid on Friday as investors wrapped up the last full week of the month and quarter.
Market Outlook: Easy Money Is Back
Once again, global central banks are back on the easy money bandwagon after the Fed and the ECB both announced more easy money measures in September which are directly aimed at stimulating global markets. The market has soared all year based on two key points: optimism that a trade deal will be reached between the U.S. and China and more easy money from global central banks. Earlier this year, the Federal Reserve reversed its stance and moved back into the easy money camp. Then, other central banks followed suit and that means easy money is back to being front and center for the market. Separately, the trade talks appear to be moving in the right direction which is another positive. As always, keep your losses small and never argue with the tape.