After a furious run to new all-time highs, stocks are set for some corrective action. The political chaos in Washington is providing a convenient excuse for some selling, and the debate over the aggressive action taken by social media in the wake of the riots in Washington, D.C., is causing some downside volatility in that sector.
The market has been downright frothy recently, and corrective action is not surprising or unhealthy. The bears are looking for the formation of a major top, but that is not likely to occur as quickly or as easily as they hope.
While talk of impeaching Donald Trump makes for a good headline, it really is old news for the market. The market has already fully discounted Trump and is looking ahead to what a Democratic-controlled Congress might do. The focus is going to change quickly to the size of the fiscal stimulus that is sure to come plus other spending, such as on infrastructure.
The key issue to start the week will be the level of speculative interest and the rotational action. Bitcoin has corrected hard here on Monday morning and will be a good indicator of the overall appetite for speculative buying. I expect to see support occur there fairly fast, but the sharp volatility is likely to cause some traders to be uncomfortable and more likely to sell into the next surge.
Small-cap trading has been the strongest part of this market recently and it is likely to continue, but there will be plenty of rotational action taking place. This is not a market to simply buy and hold. It is necessary to watch which sectors are falling in and out of favor. In the early going this morning, Chinese electric vehicle maker NIO Inc. (NIO) is leading the charge.
Traders are still feeling quite confident and will be looking to buy dips. It takes a number of failed bounces to discourage momentum-chasing traders who don't want to miss the next more.
The market has a good excuse for correcting overbought conditions, but look for support to kick in quickly. This could be the start of a topping process, but the bears have much to prove before a more negative stance is justified.