Good Reasons for Increased Caution

 | Feb 01, 2018 | 1:48 PM EST
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The indices have regained a little momentum today as it celebrates good earnings news from Action Alerts PLUS holding Facebook (FB) , Action Alerts PLUS holding Microsoft (MSFT) , Ebay (EBAY) and a few others and anticipates more good news tonight from Action Alerts PLUS holding Apple (AAPL) , Action Alerts PLUS holding Alphabet (GOOGL) and (AMZN) . Despite the upbeat reaction to earnings the risk of more downside is increasing.

There are three issues that are in play right now that may give the bears some opportunity. First is that the extended indices combined with a 'sell the news' inclination are an ideal setup for some selling into the good earnings news. Even the bulls will freely admit that the indices are still very extended but they are hopeful that good earnings news will offset that problem. Maybe it will but the bears are prepared to press at the first sign of weakness on good news.

A second issue that is at play now is that volatility to the downside has finally picked up. The algorithms that drove this market straight up for the past month are adapting to a choppier market now. In the past week we have seen more aggressive sell programs for a change. They worked and that is all that is needed for them to be triggered again.

A third issue that is bubbling up is the increase in bond yields. As I write, Barclays 20+ Year Treasury Bond Fund (TLT) is hitting its lowest point since May of 2017. The bulls don't seem unduly concerned at the moment but that is a theme, if it continues, that will matter to this market. Right now there is enough optimism about growth so that it can be ignored but that can change extremely fast.

I'm not suggesting overt bearishness but there are good reasons for increased caution. I've increased my index shorts and have been a net seller recently but I'm still looking for good buy setups. I don't try to call tops but I do react to changing conditions and there are some signs they are changing.

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