"Sometimes a cigar is just a cigar"
The most important news on Wednesday wasn't that the Dow Jones Industrial Average finally surpassed the 20,000 level. The most important news was that the indices broke out a six-week trading range and moved past the highs that occurred in December. It was a picture-perfect technical breakout and the 20,000 level provided some convenient headlines for the news media.
Traders often have a tendency to overthink market action. They want to stay a step ahead of other traders so they start to anticipate what might happen next and fail to embrace what is right in front of them.
This market has produced a classic breakout pattern. Volume could be a little higher, but there was a solid base and a very broad move to new highs. A move like that suggests that there is more upside to come. Unfortunately, many traders overthink this sort of pattern. Rather than embrace the momentum and look for reasons to enjoy the upside, they focus on what can go wrong and squander their energy trying to predict when it will come to an end.
What makes this breakout a little different is that it comes at a time when there is so much political disagreement. Emotions about Donald Trump are extremely high and spill over into how the market is viewed. Both bulls and bears use Trump as justification for their market bias, which is helping to intensify the move that we are seeing.
The most important think to keep in mind as you contemplate this market is that it has momentum. Some pundits refer to it as "animal spirits," but the theory is that positive action feeds on positive action. It just doesn't reverse suddenly unless there is some very significant event. Markets that are acting like this suddenly don't fall apart. Crashes never occur at market highs. They only start after a period of sustained weakness.
Despite the tendency of the market to trend in one direction for a while, there are traders who just can't resist the temptation to call market turns. Instead of looking for ways to embrace what is happening right now, they constantly look for reasons why it can't continue. They hate being part of the "ignorant" crowd that is highly emotional and ignoring all the problems that are obvious to the much more astute bears. Optimistic bulls are stupid while pessimistic bears are intellectuals with superior insight.
This market is a bit extended at this point and some backing and filling would be welcome. Dip buyers are lined up and ready to buy, especially because many of them are still annoyed that there weren't more fully invested three days ago.
Earnings are providing a tailwind for the bulls and a big biotechnology acquisition of a European company by Johnson & Johnson (JNJ) may help that sector.
We have flattish action in the very early going. Don't overthink what is going on out there. We have a classic breakout and they don't die easily.