After a dreary day of action on Tuesday, due mainly to concerns about the spread of a dangerous virus the indices jumped on a combination of good earnings reports, economic optimism, and some very good home sales numbers. Market players have been preparing for a rest or a pullback and were caught by surprise when stocks went higher.
Small caps and the iShares Russell 2000 ETF (IWM) were the laggards Tuesday but have bounced back nicely Wednesday morning. Breadth is running better than the inverse of Tuesday with around 4,800 gainers to 2,000 decliners. New 12-month highs are approaching 700 so there are many good pockets of momentum.
This action is primarily caused by fear of being left out. While most everyone seems to be looking for some sort of pause in this uptrend, there is still great concern that it can continue and no one wants to be left out. Trust levels are not very high so it is very hard to resist joining the party when there is green on the screen.
What we have to watch for is a sharp intraday reversal. That will be the tipoff that the action has become too overheated and can't be sustained. There is some selling as I write this but the key is that the opening lows continue to hold. If the indices go red Wednesday that will be an indication that some topping action has started.
I've made a few sales into strength but added to a position in NeoPhotonics Corp. (NPTN) and am still a very willing buyer if I can find some good setups.
The easiest mistake to make in this market is to focus too much on market timing and not enough on finding good stocks to buy.