Yesterday was a surprise for most traders, including me. Coming into the day, I was prepared for a sell-off—nothing major, but something that would make five down days in a row. With some solid earnings reports, a little easing on geopolitical tensions (at least for one day), it had traders in a buying mood.
I was selling into yesterday’s rally, wanting to take some money off the table. It is always better to sell when you can and not when you have to. In morning trading today, earnings from two stocks, Goldman Sachs (GS) and Johnson & Jonson (JNJ), were weighing on the Dow (^DJI). Goldman alone comprises about 50 points of the Dow index, which is getting dragged down by the bank. I am just locking in some profits.
Nothing has changed on the geopolitical front
I feel that even though things are a little calmer today, nothing much has really changed. North Korea did not test a nuclear weapon as feared, but it did send up a new unarmed missile. Russia is warning America not to act unilaterally on the Korean Peninsula. Government data was on the weak side, with retail sales missing expectations and yesterday’s New York regional manufacturing report also disappointed. Despite all that, the Dow finished the day up over 180 points.
When you take a close look at this week’s action, what concerns traders is the lack of volume. All the buying came in the last hour. It was enough to close the Nasdaq (^IXIC) above its 50-day moving average. The Dow and the S&P 500 (^GSPC) are still below their 50-day moving averages. Earnings season, which is starting in earnest this week, looks to be a solid quarter. What traders will be watching for are the forward guidance coming out of these companies.
US stocks still near all-time highs
Even with all this political intrigue, geopolitical conflicts, and lack of any real enthusiasm from buyers, the market is roughly only 2%-3% off its highs. The Nasdaq is down 1% from its all-time high, and the S&P down about 2% from its closing high.
The Federal Reserve continues to expect GDP growth of around 2% for the next couple of years — enough to keep inflation in check and at the same time keep investors in the market. The big problem for the market: After 8 years into this bull market, how much buying power and money is there left to take this market to new highs? Where will the institutions be getting this new money from?!
Since mid-March, there has been a lot of churning going on, and I expect this to continue.