As the major indexes become increasingly extended and price-to-earnings hit the highest levels against estimated earnings since the internet bubble days, bulls are looking for good reasons for the market to continue to move higher. They don't really need an excuse as the market seems to be going up regardless of any negative news or concerns about valuation, but it is helpful to have a narrative other than "don't fight the Fed."
The primary bullish narrative at the moment is that a rotation into "cheaper" value plays -- especially banks -- is what will fuel the next leg higher. A sharp drop in bonds -- as in the bond fund TLT (TLT) -- is causing a rise in interest rates and a steeper yield curve, which is good for banks that borrow money short-term and lend long-term.
Since everything else in the market is already bid up and is quite expensive, then why not buy the laggards that are still cheap? It is a good argument, but the problem is that laggards tend not to be leaders for long. The laggards will lead in the early phases of a bull market, but when things heat up and a bull market extends, it is typically driven by growth.
Value plays and defensive stocks tend to lead when the market struggles. They don't lead in rip-snorting bull markets.
I constantly preach to focus on price action and the price action in individual stocks gives me some concern. I'm seeing the leaders lag as money rotates into stocks that are not typically strong leadership. One group I watch very closely is biotechnology. The sector hit an all-time high in the past couple weeks and is struggling now. It may just be some healthy consolidation, but this group of high-beta stocks is always better leadership than low-beta financials. Speculation drives bull market and market players speculate much more aggressively in certain sectors with the potential for explosive growth.
Trying to call a top in this market has been causing great damage to traders and I'm not playing that game. However, when the stocks I've been trading are not performing, then I have no choice but to be more defensive. That simply means using some increased caution and tighter stops to ensure that accounts stay near highs.
When banks lead the market after a sizable move, it makes me wonder if a change in character is brewing and with the relative weakness in recent leaders I have to react in a defensive manner.