Following Thursday night's announcement by President-elect Joe Biden about his stimulus plan, stocks are set for a soft open. The $1.9 trillion Covid-19 relief plan is larger than expected, which is a positive as far as additional market liquidity but a negative as it will cause greater pressure for higher taxes.
Retail sales and unemployment numbers were worse than expected, which are helping the big-picture bears paint an ugly picture, but they continue to be confounded by the aggressive small-cap trading. The big story this week has been poor action in big-cap names while a frenzy of buying has continued in small-caps.
The irony of this action is that the bears view the very strong small-cap action as confirming their views that this market is totally disconnected from reality and is due for an epic collapse. Meanwhile, the aggressive investors who are trading this action only look at the very strong price action and they stick with it because it is working.
Earnings season is starting here on Friday morning as big banks roll out their reports. Those reports are unlikely to have much impact on the speculative trading that is taking place in small-caps, but as earnings progress we will need to watch carefully for a shift in the focus of the market. Fundamentals and valuations are of little concern at present, but earnings reports can shift that focus.
Probably the most bullish thing about this market right now is that so many market participants are anticipating that it won't last much longer. There are endless stories and comments about the market excesses that are occurring in sectors such as special purpose acquisition companies (SPACs), and even the most bullish bulls expect that the party will eventually come to an end.
The irony is that the more that people worry about a market top, the more buying power builds up on the sidelines and the greater the chance that the buying continues. The thing that drives the market more than anything is liquidity, and there are still are no signs that it is drying up.
The anticipatory bears help to create a "climbing the wall of worry" dynamic. They make people very nervous about being caught in a reversal, but when it doesn't happen they put a little more money to work, and that helps to push stocks higher. The longer the upward trend grows, the more frustrated those who are underinvested become and the more likely they are to put cash into the market.
We need to stay very vigilant and manage positions tightly, but the biggest problem for many traders is managing their fears of the future rather than focusing on the present.