Thursday was one of those days where a single index did a very poor job of telling the story of the market.
If you looked at the DJIA it appeared to be a solid day as Boeing (BA) and Disney (DIS) drove the senior index to a gain of 0.64%. Some retailers, such as Macy's (M) and Gap (GPS) , did well but if you dug a little deeper there was some carnage in the software group which has been leading the market for a while.
Zscaler (ZS) , Paycom Software (PAYC) and even Microsoft (MSFT) performed very poorly. These have been leading momentum names and are up much more than the broader market but the abruptness of the reversal was disconcerting. There doesn't appear to be any specific fundamental reason for the selling other than just profit-taking.
The IBD 50 Index, which is comprised of high momentum and high relative strength stocks, took a hit of 0.7% Thursday, giving the market action a very different feel than if you were focused on the DJIA.
So what does this mean?
Sector rotations occur quite often and aren't necessarily indicative of a major shift in the overall market. Momentum in individual stocks and sectors cuts both ways. Stocks that go up big and fast tend to go down equally fast if not even faster. Market players that focus on these stocks tend to be driven more by technical conditions than fundamental considerations, which means they will react to a breakdown in price regardless if there is any real fundamental reason for the selling.
Despite this drama in the software sector the overall market action remained healthy. There was the usual reaction to headlines about China trade, although those reactions are increasingly being used to exit into strength and are not resulting in sustained momentum. The negotiations continue Friday and there continues to be optimistic comments from the president. While there is no immediate deal anticipated, this story is keeping a bid under the market because no one knows when a real breakthrough might occur.
The other news that will impact the market Friday is the March jobs report. It is expected that about 177,000 jobs were added last month and that the unemployment rate will remain at around 3.8%, which is a fifty-year low.
With the Fed already about as dovish as it can be without cutting rates, the jobs news isn't likely to have a major market impact unless it diverges widely from expectations. A "hot" report may hit bonds a bit but they have already pulled back in recent days and the worries about an inverted yield curve have declined. We'll see some reaction to the jobs news but it isnt' likely to have a lasting impact.
Overall technical conditions remain quite good. The S&P 500 is holding the breakout that occurred on Monday and is consolidating well. Earnings season is coming up quickly and there will be some positioning into those reports. That may be what impacted some of the software stocks Thursday and we will need to keep an eye on other high momentum names.
Overall, the market remains healthy and good stock selection remains the key.