Slowing Market Offers Glimpse of Near Future
The number of stocks moving up more than 10% fell to around 125 names on Monday, which is not bad and shows there are still pockets of momentum in the smaller stocks. Friday produced more than 200 of them, so the pace is slowing, but 125 is a healthy count for a session this quiet.
One detail illustrates what is really going on under the surface. The Nasdaq 100 ($QQQ) and the S&P 500 (SPY) had exactly one 10% gainer between them, Datadog ($DDOG). All of the strong speculative action is in the smaller names. The Magnificent Seven was flat and semiconductors ($SMH) lost 2.2%.
Rest or Stall
The market has earned a session or two like this. Low volume digestion after a strong run is a healthy way to work off recent gains but it doesn’t tell you much on its own.
The question is whether this is stalling that leads to further pressure, or just some profit taking by aggressive traders who moved fast last week. What the bulls want to see is how fast buyers come back when the market gets a little cheaper, or whether the sellers keep pressing.
Catalyst Problem
My main concern remains that we do not have many catalysts lined up and we are entering peak vacation season on Wall Street. The slow action on Monday is likely a taste of what is coming for the next couple of weeks.
Small-cap earnings finish this week, and while we have CPI on Wednesday and PPI on Thursday to trade, the company-specific news dries up after that until October. Investors who are already thinking about seasonality may start selling into that gap rather than waiting to find out how quiet August gets. Nobody wants to be the last one holding a position when the volume disappears.
That is a different risk from a fundamental problem. It is a risk that comes from the absence of news or other events to create volatility.
Game Plan
My focus stays on the smaller stocks that have had good reports and I am looking for entries.
I am willing to chase a strong report when the valuation is still cheap. National Energy Services Reunited ($NESR) is the example from Monday, up 16% on a blowout quarter and still carrying a forward multiple of 16 with earnings doubling this year. Paying up for a stock like that is a different proposition from paying up for one that has already been discovered.
For the most part though I am waiting for pullbacks in the names with the strongest reports. A stock that just gapped higher on good news will usually give you a better entry in a week or two, and the consolidation gives me a level to work against. That patience might cost a little upside but reduces risk when the market gets thin.
Have a good evening. I’ll see you tomorrow.
At the time of publication, DePorre was long NESR.
