Prophesy is a good line of business, but it is full of risks.
--Mark Twain
The challenge of this market right now is in navigating between extended technical conditions and slowing momentum on one side -- and, on the other, little weakness in the major indices. The market isn't cracking, and some stocks, such as Apple (AAPL), are still running hot and hard, but breadth is slipping and small-caps are showing some signs of fatigue.
The top-callers are still very active, and they're looking for this market to fall apart at any moment. They have been wrong for weeks, but the nature of top-calling is to keep doing it until we finally see a downtick so they can proclaim victory. The fact of having racked up substantial losses is conveniently ignored in the excitement of eventually being the hero who does call the turn. We will see a turn at some point, but the folks who have worked so hard to predict it will have lost far more money than those who haven't bothered with that game.
An important thing to keep in mind about trend trading is that your level of bullishness will vary within a trend. Just because the market is still going up doesn't mean you won't temper your bullishness to some degree. In my own trading, the relative weakness of small-caps has caused me to cut back on my exposure. My money management demands that I protect gains and cut holdings that are starting to drag. While I'm not interested in trying to call a top and put on some short positions, I'm definitely going to play tight defense when things falter.
The most notable characteristic of this market lately has been the relative weakness of small-caps, while a few big-caps -- especially Apple -- are still attracting buyers. What's going on is that the aggressive momentum money is focusing on a narrower group of stocks. Hot money wants to go where the hot money is active, and right now that is mainly in Apple.
The biggest mistake you can make with Apple is to believe the action has something to do with the company's fundamentals or technicals. Apple is simply the target of intense focus by extremely short-term money that is doing quite well trading the stock intraday. It is rather similar to a Ponzi scheme: The folks trading it are confident that there are more folks out there willing to pay an even higher price. At some point, new buyers will hesitate, and there be a sharp dip. But, for right now it feels as though this stock will never go down again, and that will keep the traders swarming.
I'll continue to dig for buys and will do my best to ignore the top-callers. The weakness in small-caps is a challenge, but a few days of rest will help create some new opportunities. It isn't hard to find reasons to worry, but until the price action shifts, won't be very productive, either.
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