"Only those who will risk going too far can possibly find out how far one can go." --T. S. Eliot
The market has been at high risk for a correction for several weeks but it hasn't mattered. Worrying that a sudden collapse is on the horizon has proven to be costly. Dip-buying and momentum overcome any negatives that have existed.
The big question remains: How much longer can this one-way action continue?
The great irony is that everyone is aware that the action is extreme and unsustainable, yet bullishness remains high and there is much complacency. Why should market players worry about things like being overbought or extended when it never seems to matter?
Since the lows of March 2009, we have had similar runs numerous times. We just keep on going although we are obviously in need of a rest. The more we run, the more frustrated the underinvested bulls become and the more they keep the market running.
The most notable aspect of this sort of market action is the tenacious dip-buying. We have not had a significant weak day yet in 2012, simply because the underlying support is so strong. The buyers automatically jump in on any softness because it has worked so well. The dip-buying is an indication that market players are chronically underinvested and the market is not giving them an opportunity to correct that condition.
I can go on at great length about the nature of this market action, but there is really only one thing you need to know. The uptrend is still intact. While risks of a reversal continue to escalate, there is no sign yet that the momentum is coming to an end. In fact, we are seeing less correlated action among stocks and better pockets of momentum, which indicates that market players are becoming more speculative and actively engaging in stock picking rather than just vague bullishness.
The return of stock picking is probably the single biggest positive in this market recently. We had some nice moves on Facebook sympathy, small biotechnology names have been on fire, bulk shipping blasted off the past few days, and there are plenty of individual stocks attracting attention regardless of big-picture concerns. This is a return to the days of old, when exchange-traded funds and high-frequency trading didn't dominate. If it continues, it bodes well for the longer term.
As for this market, we have two choices right now. We can keep on anticipating a market top and be defensive or we can stick with the trend and keep on trying to knock out long trades.
Anticipating a turn will eventually work, but who knows when? It has been a money loser for quite a while. Sticking with the trend obviously carries high risk as we become more and more extended, but a high level of vigilance and tight money management can help prevent any major damage when the inevitable turn does come.
The easy thing to do in this sort of market is to keep looking for a top. The hard thing to do is stay with the trend and to keep trying to buy. We definitely need to be careful about chasing extended conditions, but continuing to do the hard thing is what is making money.
We have some minor weakness to start the day. The key to the action will be to see how the dip-buyers handle it. If they bounce us again and then fade, we may finally be in for a more severe correction. If we hold the intraday lows, watch for the buyers to keep on pushing.