Small dips lead to small rebounds

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Thursday morning the S&P 500 popped above 2,900 resistance after China said it was willing to talk with the U.S. This strength put last week’s dip in the rearview mirror and last week’s nervousness is turning into this week’s hope.

Even though the market fell five out of six sessions last week, the losses were modest and contained. As I wrote on Tuesday:

“I didn’t expect much out of this dip and that is exactly what it gave us. Since the market likes symmetry, we shouldn’t expect much out of this rebound either. The next move is most likely trading sideways near the psychologically significant 2,900 level. It will take time for those with cash to become comfortable buying these levels before we will start marching higher again.”

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Two days later the market inched its way above 2,900, but rather than trigger a surge of breakout buying and short-covering, the rally stalled and we traded sideways the rest of the day. Small dips lead to small rebounds, exactly as expected.

While there is solid support behind these prices, this market still struggles to find new buyers. There was almost no follow-on buying this morning when we broke through 2,900 resistance. Most of that breakout buying and short covering happened two weeks ago when we first crossed this line. That meant there were fewer people to buy today’s breakout. The slow summer months are winding down, but volume is still pathetically low and it will still take time before those with cash feel comfortable chasing prices higher.

Confident stock owners made it abundantly clear this summer that trade war headlines and White House scandals don’t matter. If nothing can take us down, it is only a matter of time before we go up. The biggest near-term catalyst is the U.S. reaching trade compromises with Canada, Europe, and China. That news will push through 3,000. Unfortunately, politics is a slow and dirty process and it will be a while before we can put this episode behind us.

This market is resting and refreshing following last month’s rally to all-time highs. This is a normal, healthy, and sustainable thing to do. But since we are not refreshing through a bigger dip, that means we should expect a prolonged sideways period. When the market doesn’t scare us out, it bores us out. Things still look great for a year-end rally, but we need to be patient and let those profits come to us. This is a slow-money trade and we will have to wait a while before the next fast-money trade comes our way.

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FB is flirting with recent lows as it struggles to overcome the fear of government regulations limiting its ability to make money. But as I wrote the other day, these limitations won’t be as draconian as feared and the stock will recover once these headlines are behind us. Even though prices could slip further over the near-term, this is a buying opportunity, not an excuse to sell a good stock at a steep discount.

NFLX is doing a better job than FB in recovering from last month’s earnings fueled selloff. As expected, last month’s weakness was a buying opportunity and no doubt reactive sellers are already kicking themselves for being so weak.

AAPL is already recovering from Wednesday’s sell-the-news reaction to their new phone lineup. Nothing unexpected or exciting was announced, it was simply more of the same. But more of the same is a good thing because that is what pushed AAPL over a $1 trillion market cap a few weeks ago.

AMZN is recovering from last week’s dip, but this looks more like a consolidation than the start of the next surge higher. We came a long way over the last few months and sideways consolidations are a normal and healthy part of every sustainable move higher. Things still look good for further gains later this year as desperate money managers will be forced chase the biggest winners into year-end.

Bitcoin climbed to the mid-$6k level, but the total lack of demand continues to be a problem. Last month’s bounce to $7.5k fizzled and no doubt the same thing will happen here. We could drift up to $7k resistance over the next few days, but the downtrend is still very much intact. Nothing gets interesting until we recover the previous highs near $8.5k. Unless that happens, expect lower-lows to keep piling up.

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Jani

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