My trading style is to focus on quick reactions to changing conditions rather than try to predict what the future might hold. However, even a highly reactive trader does need to have a market thesis in mind as they navigate the market.
My current market thesis is that the small-cap breakout that occurred this week is at an early stage and is likely to continue for a while. I'll change my mind if I see a shift in the level of speculative interest or if there is a notable failure of support levels, but currently my view is that it is time to be long and to keep looking for new opportunities. I'm currently about 70% invested, so I have some flexibility.
If all the indices looked like the Russell 2000 (IWM) , I doubt there would be any real discussion about overbought conditions. The IWM is a little overbought short term, but it is nothing like the Nasdaq or S&P 500.
One of the issues that troubles many market players is whether there can be a sustained rotation out of the major indices and into small stocks. There is a strong institutional bias for big-cap stocks, and that money is never going to really embrace small-caps, but there are periods - like back in February - when the big-caps underperform the small-caps.
Currently, we have to navigate a little profit-taking and let some things reset, but I think the next few weeks are going to be very kind to aggressive traders that focus on finding quality setups. Don't let a little routine volatility turn you into a premature bear. The conditions for rotation into small-caps is excellent.