Ready for a Rest

 | Jan 30, 2012 | 8:34 AM EST
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"Sometimes the most urgent thing you can possibly do is take a complete rest." --Ashleigh Brilliant 

Overseas markets are all in negative territory this morning and U.S. futures are weak as eurozone worries take hold again. We probably shouldn't be at all surprised that Greece has not hammered out a debt deal yet. In addition, Spain is saying it is not going to make its growth targets for 2012, there are sovereign debt downgrades, and worries about today's European Union summit are adding to the pressure.

Unfortunately for the bulls, the market has been increasingly extended on lighter volume and is in a very vulnerable position for some sort of correction. As usual, we have continued to run up longer than many of the bears anticipated, but sooner or later the rules of gravity always apply and it looks like we have news catalysts for some corrective action today.

Some may point to the odd action Friday as a warning sign that a pullback was due. Although the indices were weak, we had strong positive breadth and a high level of speculation in many Internet names due to news of an upcoming Facebook public-offering filing. Quite a few traders were high-fiving each other as they played some aggressive moves in stocks that haven't done much in a while. 

The conventional wisdom is that speculative bursts like that often signal that the market is too frothy and in need of a correction. I don't particular agree with that thinking but the technical condition of the indices isn't very supportive of further upside right now. I'll be watching to see if the Facebook news can help to keep some of these pockets of momentum percolating. I suspect traders will be itching for more action and may make it a self-fulfilling proposition.

So far in 2012, the key to this market has been the dip-buyers. The have shown up almost every single day and have prevented any notable pullbacks. Thursday was our first negative trend day of the year and our first indication that the dip-buyers may be losing some zeal. Typically, it takes a few failed bounces before the dip buyers lose their resolve and we will have to watch carefully for that.

I'm hopeful that good stock-picking, like we saw Friday, will take hold again this week. Unfortunately, the tendency when Europe has become an issue is for stocks to move in lockstep with the headlines. That was one of the things that made the market particularly challenging for traders in the latter half of 2011. It was all about market timing rather than stock-picking, which, for many traders, is not nearly as appealing.

We'll see what the dip-buyers do with this open. The key will be to hold above the early lows and not let another trend-down day develop. Speculative action in Facebook plays should be on the radar again but it is going to require some aggressive trading to profit.

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volatility is quite low here, and we could see some downsides here in the short term. ...



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