Is bull market’s sponsorship thinning?

The broader market is in need of a reset.This reset is needed both to consolidate gains and compress valuations, and also to provide a more sustainable platform, predicated upon anticipated earnings growth and accelerating economic data, from which to move higher.

Since August 7, the Dow Industrials have given back 383 points or 1.73%. The S&P has slipped 0.08% and the technology-weighted Nasdaq has led the way lower with a 2.61% move. The recent price action in equities has left our uptrend under pressure as distribution days have mounted––as evidenced by the Nasdaq’s outperformance to the down side, in the period referenced. It has accumulated the greatest number of distribution days over the past month: 9. The S&P 500 on the other hand has totaled 5 distribution days over the same period. On Friday, August 18, the Nasdaq’s negative performance was the result of a significant intra-day reversal and matched with accelerating volume––an indication that institutional sponsorship is behind the selling.

In the cases of earnings and economic data, there remain reasons to be constructive on the market once our called-for modest reset finds a tradable bottom.

Q2 results from S&P 500 reporting companies have been solid with 65% beating consensus expectations. Guidance has largely also been quite positive. Most recent economic data has also suggested the US economy is on better footing that it was in the first half of the year. From the Employment Report data to Weekly Jobless Claims and initial Q2 GDP data (all of which we have covered), it is clear that the economy is reaccelerating after a unexpectedly weak first half.

Flickr photo: by NASA Goddard Photo and Video Aubrey Gemignani