This morning is a classic example of how the market drives very aggressive dip-buying. The gap-up open on the Bank of England interest-rate decision obviously made a very overbought market even more extended. The typical response is to fade that sort of move. That works for a few minutes but then the dip-buyers stampede in and push us right back up.
The market action that we have had lately produces a huge supply of folks that want to buy dips. The market goes up so fast that it leaves many on the sidelines. There are also those that have sold down positions and played some defense that hate missing out when momentum is so strong. Throw in some squeezed bears and you have a recipe for aggressive dip-buying.
The question now is how long those dip-buyers will stick around. Are the dippers flippers? Probably, which makes it very important to watch the day's low in the index. If that is breached, it changes the tone of trading.
As I mentioned yesterday, I did a bit of defensive positioning and this morning's action is not doing anything to help me re-establish positions. My stock of the week, Fabrinet (FN) continues to act well, but even that is something I'd rather buy on a pullback. My cash level has gone up quite a bit and I probably will raise it very quickly if the SPDR S&P 500 (SPY) trades back under $215.75 or so.