"I don't really make decisions, I go with the flow."
-- Nicole Kidman
So far this week, the S&P 500 has hit a new all-time high as it has gapped higher at the open on both Monday and Tuesday.Volume has been a bit light and there has been some rotation in and out of technology, biotech and financials, but breadth is solid and the momentum strong.
This technical action suggests that there is more upside to come, but many stocks are now extended and in need of a rest. In addition, the big Apple Inc. (AAPL) event is providing a "sell the news" catalyst.
There is some disagreement over whether the new Apple products are a hit or a flop, but there is no question that the announcement was very heavily anticipated and the selling following the event suggests that the market wasn't surprised by what was offered. (Apple is part of Jim Cramer's Action Alerts PLUS charitable trust.)
It is very likely that dip buyers are lurking to snatch some Apple shares should they pull back to support levels and I don't expect them to be very patient. The key level for AAPL is $155, which is the bottom of the recent trading range and the 50-day simple moving average.
Softness in Apple will influence the indices due to its massive weighting, but there are other stocks in need of a rest as well. The question for us to ponder this morning is how to deal with a market has momentum but is overbought.
The first thing to keep in mind is that markets that are acting like this one don't just collapse. The bears like to believe that the market is going to suddenly realize that there is no logical basis for its strength and fall apart, but it just doesn't work that way. A top will take time to develop and it won't be easy to identify a single point when a turn occurs.
The bears also have hoped the well-known negative seasonality of the month of September would provide them some assistance, but that isn't happening and probably has contributed to the mispositioning that has helped to accelerate the recent strength.
One of the biggest factors helping the market right now is that this strength has caught many folks by surprise and they have been forced to reposition to keep pace. The third quarter rapidly is coming to a close and performance anxiety is pushing fund managers to find a way to keep pace. Sitting in cash is painful when the indices refuse to correct.
The dollar is weaker this morning and U.S. Treasury yields are down, which is reversing some of the moves of the last couple days. Also, miners and industry metals are weak but oil steady. The main thing moving the indices is some weakness in Apple and its supplies. The selling there has been spilling over into technology and the FANG names, but there is by no means a rush for the exits.
While you may not want to be overly aggressive with new buys, there is even less reason to be aggressive with a bearish view.