You may have a fresh start any moment you choose, for this thing we call "failure" is not the falling down, but the staying down.
--Mary Pickford
The mood has turned cautious as we kick off the second quarter of 2012 after one of the best first quarters in history. Many pundits believe we are long overdue for some pullbacks, and with the first quarter now over and seasonality turning negative the conditions are ripe for profit-taking to accelerate.
Interestingly, the end of the first quarter saw little in the way of window dressing. We had four fairly poor days, and many of the key leadership stocks such as Apple (AAPL), Priceline (PCLN) and Google (GOOG) finished on a weak note. There seemed to be more interest in actually locking in some good profits rather than marking up existing positions.
The most intriguing thing about the action of the past few weeks has been the strength in IPOs. Not only is there strong pricing and good action on the first day of trading, but some of the older IPOs with aggressive valuations, stocks like LinkedIn (LNKD) and Yelp (YELP), have been attracting momentum players.
For contrarian bears, this sort of action in IPOs is classic topping action. When the level of IPOs ramps up and speculative interest picks up, the first thing the bears start to talk about is the top in 2000 when the IPO market was in a frenzy. We are a long way from that level of excitement, but it is notable how IPOs have become the hottest group in the market recently.
One of the big positives the bulls have going for them is a very large faction of market players are looking for a correction. They have been hunting for a top for weeks, but we haven't seen any really aggressive selling yet. There are some cracks in the foundation as small-caps underperform and market leaders lose momentum but no signs of a major top.
The major bearish argument is that we simply can't sustain this level of action for much longer. The lopsidedness of the price movement, the never-ending dip-buying and the lack of volatility are hallmarks of an uptrend, but they have been extreme far longer than most anyone thought possible.
While this market may appear a bit tired and in need of a rest, don't expect an immediate collapse. The great likelihood is that we are going to battle it out for a while as we consolidate. We can spot warning signs that should make us a bit more cautious, but nothing that suggests overt bearishness.
Stay focused on your individual positions and manage them tightly. If they breach support or start breaking down technically, be disciplined and do some selling. If they come back and start to run again you can always rebuy them. If you have to pay a higher price, just chalk it up to the cost of insurance.
The big positive for the bulls is that more and more folks are leaning toward the downside. Such a scenario can give us some quick spikes, especially if the bears are squeezed once again.
