"Do not wait until the conditions are perfect to begin. Beginning makes the conditions perfect."
-- Alan Cohen
Maybe it is too obvious, but the technical action in the market is very positive. This is textbook action. There has been a long period of consolidation since mid-December, a couple of thrusts to the upside and then a breakout to new all-time highs on good volume. Breadth was exceptional strong and, after some recent struggles, small-cap stocks gained some vigor and provided a foundation for the move.
There were over 600 stocks making new 12-month highs, with chips, financials, steel and several other sectors leading the way. Earnings have been generally good, with some big moves in names like Cliffs Natural Resources (CLF) , Paycom Software (PAYC) and Deckers (DECK) .
On Tuesday, the bears were yapping about the highest bullish sentiment readings in years. This, of course, is viewed as a contrary indicator, based on the theory that the buyers must be running out of cash if they are already so positive about the market. The problem with that theory is that it fails to measure the degree of bullish conviction. There may be quite a few folks who are optimistic about this market, but they aren't totally convinced. While there is optimism, there isn't wild enthusiasm. There is still buying power in reserve.
In addition to the bulls still being able to fuel additional buying, there is also a big group of bears that are convinced that the "Donald Trump Rally" is going to come screeching to a halt at any time. They are convinced that fulfilling policy promises will prove to be quite difficult and that the personality flaws of the President will led to chaos. Many of these bears seem incapable of separating their political biases from an objective valuation of the market's technical action, and that provides for fuel for the upside.
Technical and fundamental conditions are strong for further upside, but if there has been a flaw in the recent action it is the lack of sustained momentum. There have been a couple of previous attempts at a breakout that failed to gain traction after a strong move like we had yesterday. Buyers have been hesitant to chase too aggressively, and have shown a preference for buying dips instead. That has led to some very strong underlying support and the inability of the bears to make any progress, but it has kept the indices in a tight range for a while.
Yesterday's move took us out of the trading range and gives the bulls an opportunity to show they can produce some momentum. The basis for the move yesterday was some vague promise that a Trump tax plan is coming soon. That sort of news can't be disputed and the lack of details makes it easy for the bulls to embrace as a major positive. It probably won't be easy to work out the actual provisions and push it through Congress, but for now it is major positive and an easy justification for more buying.
To put it in simple terms: The market is in an uptrend and the bulls have the advantage. The obvious course of action is to look for ways to put capital to work so we can ride the trend higher. It may sound simplistic, but that is what is working.