The market is sending mixed signals

mixedsigns

Lately we have witnessed an improvement in market conditions, with more stocks coming out of bases, a rebound in oil prices, indexes closing near all-time highs and the decline in the number of distribution days. This move has been accompanied by positive breadth readings, which indicates the market has somehow shown a more healthy behavior. On Wednesday a very positive day occurred, propelling the market higher due to a very strong rally in the price of oil (with the corresponding rally in the energy sector). In a year that has been scarce on the IPO front, last week’s action proved the opposite with many stocks debuting with success. But if the IPO activity has been in a slow environment, on the M&A front the activity is on fire, particularly within the health sector, indicating that there is still value and opportunities out there. Yet, the Bulls have also reasons to be worried. The NASDAQ has been leading the army, which is exactly what I like to see, but the 5,000 mark has proven to be a weak support level for this index.
Although we have seen closes above 5,000, the index is having a hard time holding that level, which is an issue to bear in mind. Despite the uptrend is still in play, the general market seems tired. A situation that cannot be dissociated by the massive run the market has made since the bottom achieved in 2009.
The pattern continues to be the same from quite some time, a slowly uptrend move with minor pullbacks, followed by short lived rallies. This behavior denotes a division among market participants in which neither the Bulls nor the Bears have the stronger hand. In a more refined analysis, even the Bulls (or the Bears) are divided within their fields.
We’re in one the busiest weeks of the earnings season, and if the number of companies beating on the bottom-line is of no surprise, given the fact that expectations have been set in such a lower bar, the percentage of companies missing on top-line is more problematic. The increase in profitability should come from growing revenue (companies expanding their activity and growing organically) rather than cost cutting practices.
Current market environment is indeed complex and misleading for the unwary; just two days after Wednesday’s super day, on Friday the market plunged following the Global sell-off. With this kind of action it’s hard to be unequivocally optimistic. The market has shown resilience, but at the same time signs of weakness continue to persist. In a strong rally, it is rare to see such days. Even with all these issues, we are far from the typical action seen in strong corrections or bear markets, when individual stocks breakdown hard, falling from bases and making new lows each day.
So, what is the wisest approach right now? Play selectively and have a defensive approach.

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