The S&P 500 has been in a strong uptrend for nearly two months. The selling Monday and Friday has resulted in a give back of about three days of gains and filled a small gap on the S&P 500 exchange-traded (SPY) chart. The uptrend is still intact, and so far there is no technical damage. If anything, this is just healthy digestion, but that doesn't mean that it can't develop into something more problematic.
From a trading standpoint, a market with extremely lopsided action, like we've seen lately, simply stops offering much opportunity. We need sentiment to shift for better entry points to develop. The mood still feels quite complacent, but many of the recent winners are seeing some sizable pullbacks. Breadth is now running two-to-five negative and the ratio of new 12-month highs to lows has dropped sharply.
When the market acts in this manner, I believe the best course of action is to err on the side of caution. While I don't think the indexes have yet seen their highs for the year, I'm not going to act on that belief. I'm going to sell stocks before I give back too many gains, but I'll stick with those that still look OK.
My focus remains on being reactive. Right now the action is weak, so that means selling laggards and becoming more selective with new buys.
Many market participants root for the market to go up every day but if you really want better opportunities we need some aggressive selling at times. A sell off now would be an ideal setup for better trading into the end of the year.