To understand the way that this market is acting, it is necessary to understand how money management works. Only a small amount of money in the market is controlled by individual investors and those investors often don't appreciate how money management tends to drive action like we have now that seems irrational on various levels.
When the market is as strong as it has been lately, there is a tendency for clients to give their money managers more cash to invest. Those clients don't think about the market as being extended or overbought in the same manner that individual traders or investors might. The clients using a money manager just wants to put some cash to work and share in any gains.
So what do money managers do when they receive an inflow of new capital? In most cases, they put it to work immediately. Many managers view the job of money management as simply to allocate assets. Their job is to put money into equities and not try to time the market. It is the client who is making timing decisions and it is the job of the money manager to simply find the best equities to buy.
When that is the view of the money management process, then the logical thing to do is to immediately dump any new funds into an index exchange-traded fund like SPRD S&P Trust ETF (SPY) or the Invesco QQQ Trust (QQQ) . This form of passive investing is what keeps the indexes running higher and explains why valuations and overbought technical conditions do not matter.
I posted a poll on Twitter (TWTR) earlier Tuesday and asked what readers would do if they were money managers and had an inflow of new capital. About 42% said they would stay in cash and wait, 30% said they would buy an index ETF like SPY and 28% said they would buy individual stocks.
The level that would stay in cash is much higher than what I would expect actual money managers to say. Most don't feel they have the ability to sit on large amounts of cash for very long. They need to put that money to work quickly to feel like they are doing their job and that is what gives us market action like we are seeing now.