The market was fueled by hopeful bears leaning the wrong way on Thursday -- and is not technically extended going into the weekend. For a while on Wednesday night, it looked like the very dovish Fed policy statement might produce a negative response, but the market traded straight up on Thursday as it squeezed the bears and frustrated the underinvested bulls.
With the S&P 500 now at its highest level since October 10, technical conditions are extended and the market is looking harder for an excuse to justify some profit taking and consolidation. That excuse showed up in the form of the weakest German manufacturing data since 2012. That has driven the German 10-year bond yield below zero for the first time in two years.
There has been increasing concerns about a slowing European economy for a while -- and this data is confirmation of the problem. In his comments on Wednesday, Fed chair Jerome Powell, acknowledged the weakness in Asia and Europe as part of the reason behind the Fed's uber-dovish policy.
The indices are set to gap down at the open on the German news, and we'll see how well the market reacts. The bears, of course, are hoping that there will be a sudden collapse, but this is hardly surprise news. The German Dax is only trading down about 0.3% as I write, with Europe soft and Asia mixed.
What has been most notable about the market strength recently is the strength in Apple (AAPL) , semiconductors and some of the other big cap technology names. Small-caps, in the form of the iShares Russell 2000 ETF (IWM) , have lagged a bit but came back yesterday. And financials, in the form of the Financial Select Sector SPDR ETF (XLF) , have been the weakest sector on worries that the dovish Fed will invert the yield curve.
Stock picking has been very strong and is reflected in the list of new 12-month highs, which hit nearly 400 names yesterday. If you have focused on individual stock picking rather than the commentary on the macroeconomic situation, you have likely done quite well.
So now what? With the indices extended after a good run, it is important to not give back too many gains if there is some consolidation at this point. That doesn't mean making predictions about a major market top. It means protecting gains and making sure that you keep your accounts as close to highs as possible.
The easiest thing to do in a market like we have right now is to predict a reversal. It seems very logical after the run that we've seen -- and it is not hard to come up with a list of reasons, such as the weak German data this morning.
However, keep in mind that there is tremendous pressure for money managers to keep pace with benchmark indexes -- and that has been very difficult with the straight up action this quarter. The surge in names like Apple (AAPL) and Amazon (AMZN) is a good illustration of how managers are reaching for returns at an accelerating rate.
It looks like we may be due for some consolidation at this point, but don't read too much into it. A little softness after the recent run is not only normal, but healthy. If it morphs into something more drastic, be ready to take more aggressive defense steps. But don't be influenced too much by the bears that are going to pretend that any downtick is the start of a market crash.