The indices have been roaring higher recently, with just two negative days out of the last eleven for the Nasdaq. The headlines and social media are full of stories about wild trading in companies that are bankrupt or face obvious financial issues. Covid-19 and civil unrest dominates television news, but have had no impact on market sentiment.
It is a recipe for a bubbly market, but even bubbly markets need some rest. The indices are indicated lower this morning and, most interestingly, there isn't any major news headline that is causing the pressure. It is primarily a case of too far, too fast.
One of the most difficult aspects of the market recently has been the lack of 'natural' ebb and flow. It has been extremely lopsided action and has largely been driving by fear of missing out combined with a high level of liquidity.
The rise of 'Robin Hood' traders has created a trading environment unlike anything we have seen since 1999-2000. These small and inexperienced traders have forced the big money and hedge funds to chase price action regardless of fundamentals. There has been no way to keep pace with this advance unless you have been willing to buy stocks with questionable fundamentals and valuations.
Does a weak open this morning suggest that this bubble action is about to pop? This sort of speculation does not die easily. Those that have missed out are anxious to buy a pullback and see if they can catch the next wild move. They won't be too concerned about being caught in a nasty downside reversal until they actually suffer some losses.
Many market players are breathing a sigh of relief this morning as they see the indices indicated lower. They are tired of trying to chase this market and are anxious for better entry points. They aren't bearish. They just want a market that trades in a manner that they consider to be more reasonable.
Strong markets tend to stay sticky to the upside. It takes a while for traders to become discouraged and to start dumping stocks. The first thought of most traders at this point is 'buy the dip' rather than 'run for safety'.
We shall see how the price action develops from here, but keep in mind there is big demand for stocks now primarily because they have been working so well. Those buyers aren't fearful right now. They view a soft open as a 'buying opportunity'.
If you are looking for an indication that a turn is coming, then watch the close rather than open. A weak close is a much better indicator of a change in market character than a weak open.