There is nothing constant in this world but inconsistency. --Jonathan Swift
If the recent pattern continues we are in for some weak action.
We have had alternating days of strength and weakness lately as we seem to immediately forget what had just occurred. One day it looks like we are about to fall apart as buyers, show no interest, and then the next day we blast higher as shorts are squeezed and underinvested bulls try to add some exposure.
The good news is that despite this choppy action the overall technical pattern remains very positive. The uptrend that began to start the year is still intact and the recent volatility has actually helped to ease overbought conditions and create some consolidation.
The bears are going to argue that this sort of action is an indication that market players are becoming more indecisive and that this is indicative of a market top. They have a valid argument, but it is also true that this sort of action may simply serve as a pause that refreshes and sets us up for another leg higher. Once again, I remind you that we don't want to be bearish until there is some actual price weakness. Anticipating a market turn simply has not worked.
One of the more interesting dynamics at work right now is that after the straight-up run even some of the bulls are hoping for a more severe pullback. These V-shaped moves always leave a lot of bulls underinvested and they are very frustrated when they don't have an opportunity to buy on dips. Of course when we do have dips, like on Monday or last Thursday, there is some hesitancy to buy, but that definitely was the smart move.
In addition to the choppy action lately the biggest challenge right now is that we don't have very strong leadership. There are very few standout big-cap stocks that are driving this market. A year ago we had Apple (AAPL), Priceline.com (PCLN) and others roaring higher to drive the indices. This rally has not had that sort of leadership. Obviously there are some good performers and we have a good supply of stocks hitting new highs each day, but the momentum has been surprisingly sedate for a market that has been going straight up.
I'm finding the biggest challenge of this market right now is keeping money at work. When we have choppy action it tends to trigger stops and profit taking and it is very difficult to put that cash back to work by chasing when we have a day like yesterday. My cash levels keep increasing, although I'm still generally quite bullish.
The way I deal with this sort of action is to just keep looking very hard for new buys and not focus too much on overall market timing. If the market is healthy, individual setups should continue to occur, but if there is no follow through and stops are triggered quickly then we become more defensive by default.
We have a quiet start this morning and, once again, no signs that the market cares what occurred yesterday. Look for choppy action to continue.