With the third quarter almost in the rear-view mirror, James “Rev Shark” Deporre has some queries for investors:
--- Can the indexes continue to build on the powerful V-shaped bounce that kicked in after a sharp drop a week ago?
--- While stocks were able to fully recover their losses in just four days, do they have the juice to keep on running as we look ahead to third-quarter earnings?
They’re questions with no direct answer, although the trading trend is positive.
“The market has undergone some standard corrective action from around the start of the month,” Deporre wrote recently on Real Money. “It picked up steam last Monday with the Evergrande debt crisis serving as a convenient excuse, but this market has had good underlying support, and the dip-buyers quickly showed up.”
What’s been most positive about the market throughout several weeks of corrective action is the ongoing interest in stock-picking. “Retail investors have been active in a number of speculative themes and have not been at all discouraged by the corrective action in the indexes,” Rev Shark noted.
The action of the last few weeks was triggered in part by the large disparity between the indexes and secondary stocks. “The indexes and some key big-cap stocks have been extended while only about 40% of all stocks have been trading over their 200-day simple moving average,” Deporre said. “This disparity has been building since late February, and the last few weeks has helped to close the gap to some degree.”
With October beckoning, the stock market still has a couple more weeks of negative seasonality to deal with, but Rev Shark said that investors should start to see positioning ahead of strong earnings reports. “One positive about the recent corrective action is that it has helped temper expectations, and that will help to prevent a "sell the news" reaction to some degree,” he added.
There actually is a bearish argument for this market, but that helps to create a "wall of worry" dynamic that can actually be a market positive. “When the market fails to embrace the negative thesis, the folks with idle cash slower put it to work out of fear that they will be left out,” Deporre said. “This pushes the market higher and causes more fear of being left out.”
Consequently, Deporre continues to see good stock-picking, and that will be his primary focus going forward. “If selling becomes more correlated and persistent, then I'll be more concerned,” he said.