"That the birds of worry and care fly over your head, this you cannot change, but that they build nests in your hair, this you can prevent." --Chinese Proverb
Many market players were far too eager to turn bearish with the weak action Wednesday. The big intraday reversal of Apple (AAPL) convinced them that a top was forming and they rushed to take defensive positions, then found themselves trapped on Thursday when there was no downside follow-through.
Market players have been anticipating a top for weeks as the market has produced another of its amazingly lopsided moves without any pullback or consequence. It seemed reasonable that we should pull back soon after that sort of action, and that is why folks were so quick to embrace the downside at the first sign of trouble.
What the top-callers forget is that dip-buying continues to work extremely well. In fact, it becomes even more likely to produce gains when too many people are anxious to bet on the downside. Those who suddenly turned bearish Wednesday night rushed to find new buys and to cover shorts Thursday, which helped to accelerate the bounce even more. Plus, it reinforces the inclination to buy all weakness in the future and provides even more support.
Another factor to consider is that the majority of the action is computer-driven and thrives on catching market players out of position, much like the dip-buyers do. Once a bounce kicks in, the computer programs have a tendency to keep the momentum going as they extract small gains on the ride back up.
So here we are, right back where we have been for weeks. The market is uptrending, weakness is bought immediately, and technical or fundamental negatives are ignored. The market is happy to anticipate a positive resolution in Greece next week and to keep on chugging even though it may be extended and badly in need of consolidation.
We have two choices. We can keep trying to anticipate a top and maybe get lucky and catch a little move like Wednesday's, or we can stick with long positions and keep trying to extract profits as stocks become more extended.
Many investors, particularly mutual funds, don't like to buy strength, but that is the style that works right now. The fact that this approach works so well helps to create a huge supply of dip-buyers. They never get much of a chance to get in, and when we finally have a pullback, as we did on Wednesday, it doesn't even last a day.
The early action is flat. We have a three-day weekend and there is the likelihood of news about Greece on Monday when we are closed, so positioning will be tricky. I'm looking for flat-but-choppy action and I don't expect to see any major moves today.
