One of the hardest things to do in trading is to stay with an uptrend as technical conditions become increasingly overbought and extended. The natural human reaction is to anticipate some sort of rest or pullback after a big run, but when that doesn't occur the fear of missing out kicks in and overrides the need to be cautious.
Many, if not most, market players believe that the market needs some sort of rest at this point. Even if it is just for a day or two, the rational thing for this market to do is to rest.
On Tuesday, many market players were looking for the signing of phase one of a China trade deal to be a potential catalyst for some selling. The logic was that since all the good news has already been anticipated and discounted, there wasn't any reason for the market to continue higher.
There was some slight "sell the news" action, but market players refused to vigorously embrace it and now the indices are set to gap-up at the open and hit new all-time highs. There doesn't appear to be any news to account for this lopsided strength, but it is very clear that there is a huge amount of cash still trying to find an entry point.
This is not sustainable action, but it certainly can last much longer than most people think. As the old saying goes, the market can remain irrational far longer than you can remain solvent.
There are basically two choices for dealing with this market. Either you can anticipate that the uptrend will come to an abrupt end and the downside will be fast and furious, or you can ride the momentum as long as possible and look to react when there finally are some signs of weakness.
When a market is acting like this one, the anticipatory approach will leave you on the sidelines prematurely. It will feel like it is the prudent approach to dealing with risk, but the opportunity cost of sitting on the sidelines is tremendous.
A reactive approach to this market necessitates a higher level of risk, as a turn can occur quite abruptly, but the cushion of profits that is produced while riding a strong trend should help to offset the pain that will eventually occur when a turn does come.
Rather than focus too much on the indices, my game plan is to focus on my individual stocks and let them guide me. When they weaken, I will sell and my cash levels will increase. They may not be correlated with the action in the indices, but they are the best warning signs of impending problems.
I suspect that when this market does eventually turn, it will occur with a sharp intraday reversal. A weak close or two that trips up dip buyers will be the signal that something is shifting. There are no signs of that right now and no concern about overbought technical conditions.