"It is difficult to get a man to understand something, when his salary depends on his not understanding it."
-- Upton Sinclair
On Wednesday, the Dow Jones managed its ninth straight gain, but overall stocks were mostly lower. Breadth was negative, volume slowed and the number of stocks hitting new 12-month highs declined. It was a minor pause after a strong run, but it is impossible to avoid some contemplation of the possibility that a market top may be near.
I constantly preach that we should avoid the temptation of fortune telling and focus on price action, but that doesn't mean we should be unaware of the arguments presented by those that are constantly looking for a market turn. The potential catalysts for a correction are painfully obvious and perhaps their obviousness is part of the reason that they don't seem to matter much.
First and foremost, the bears are focused on the possibility that Trump tax reform policies will be a disappointment and may not be easily passed. It is economic optimism that has been fueling the rally since the election and the bears are certain that hopes are far too high. So far that view has not been tested, but we are fast moving to the point where the focus will shift from Trump's Executive Orders to his ability to craft policy with Congress. Trump's supporters have always viewed him as a deal maker that will push through productive policy. Expectations are high and that is what the bears think will eventually cause a major market turn.
For years, the bears have believed that it would be a hawkish Fed that would be the cause of a major market turn. Don't fight the Fed worked gloriously well on the way up, so why shouldn't it work on the way down when Janet Yellen starts rolling out some rate hikes?
The Fed may still be an important economic catalyst, but the view recently has been the market can handle higher rates if the increased expectations for economic growth are met. If Trump manages major tax reform and can find an effective replacement for Obamacare, then higher rates may be a simple annoyance rather than a driving force.
That is the bearish theory in a nutshell. There are plenty of other issues and embellishments, but it isn't hard to understand the thinking of the pessimists.
The issue is when and if such thinking might matter. The pause in the action yesterday fans some slight fires of hope, but the winds of momentum prevent them from igniting. There simply is too much positive price action for the negative thinking to take hold.
The bears keep jumping up and down and pointing at all the crazy contrary indicators that are at extreme levels, but the market simply shrugs and continues to trend higher. The market has paid scant attention to the bearish arguments and that is all that matters right now.
The way to navigate this market isn't complicated. Honor the uptrend as long as possible, stay focused on managing positions and be judicious in making new buys. When the inevitable turn does occur, play strong defense and do your best to protect the gains you have produced.
While it is good to be aware of the bearish arguments, there is no reason to act on them until the market gives us good reason.
We have a flattish start this morning as oil is helping matters and the dollar edges higher.