The S&P 500 has been up for six straight weeks and is sitting at an all-time high. This bull market has been running for over 10 years and the various arguments for why it can't continue have been growing louder and more intense.
The easy thing to do at this point is to embrace some of the skepticism, raise cash levels and wait for the corrective action that so many folks think is inevitable at this point.
The only problem is that the price action refuses to cooperate with this negative view. Early indications on Monday morning are for a positive open. However, the strategists that study market data tell us that contrary indicators are reaching extreme levels. Esoteric indicators like the Hindenburg Omen are flashing warning signs and economic growth around the world has been slowing.
Setting forth a bearish thesis is not only easy but sounds logical and compelling. The problem is that there are only two things that really matter to the market right now. The first is the potential for some sort of Phase One trade deal with China and the second is that the Fed is very supportive of the market, even though it is not cutting interest rates.
These two positives are creating a psychological dynamic that feeds on itself. A big part of it is fear of missing out (FOMO). Many bulls are not only underinvested but they are struggling to keep pace with very big gains in the indices. The indices have outperformed the average stock and that makes it extremely difficult for money managers to produce relative strength.
Fear of missing out is related to the phenomena of "climbing the wall of worry." Market players that are skeptical and playing defense for a variety of reasons have no choice but to make incremental buys as the market continues to move higher. They see the problems that the bears keep shouting about, but when the market doesn't pull back, then they have no choice but to do some buying so their relative performance doesn't suffer even more.
Another factor that makes it so hard to predict corrective action is that the computer algorithms that trade a huge percentage of the market volume are currently using programs that immediately buy any and all dips. Last week, we saw them come into play several times when there were negative headlines about China trade. The dips lasted just minutes before the buyers showed up and pushed the indices back to highs. As long as the potential for a China trade deal is out there, this dynamic of buying dips is likely to continue.
It is understandable that many market participants are concerned that a major correction is about to hit, but there is nothing in the price action, other than some overbought technical conditions, to support that.
My game plan for this is to ignore the anticipatory bears and to stay focused on the individual stocks that I'm holding. When they start to act poorly, that will be the canary in the coal mine that tells me that a turn may be developing.
Calling for a correction at this point is the easy thing to do, but it comes with a very sizable opportunity cost. The bears that have been predicting disaster haven't made money in weeks while the bulls have built a substantial cushion of profits. Focus on the price action, not bearish arguments.
