The big question that market players are pondering on Tuesday morning is whether there is a news event that will finally cause this extended market to rest. There have been several events recently, such as the signing of the China trade deal, that were a good excuse for profit taking, but the market refused to pullback.
This week there is a series of news events that could be used as justification for selling but market players are so well conditioned to buy dips that pullbacks have been more positive than negative. Many buyers have wanted to buy weakness recently but have not had a chance.
This most important market issue this week is earnings reports from leading stocks such as Netflix (NFLX) , IBM (IBM) and Intel (INTC) . The reaction to these reports will tell us quite a bit about the market mood. The financials that have reported in the past week did quite well and the Financial Select Sector SPDR Fund (XLF) is in position for a move to new all-time highs.
According to the headlines we see, the news media believes the most important event this week is the impeachment trial, but this has been totally meaningless to the stock market. The political battle will be unrelenting, but the outcome of dismissal is near certainty at this point.
President Trump is speaking in Davos this morning, but what is driving the action in the early going is growing concerns about a new strain of coronavirus in China. Asian markets are down across the board and that is causing some weakness in the early going.
Market bulls have been unconcerned about negatives for one very simple reason -- they believe that the liquidity created by the Fed recently will override all other concerns. Even bulls have had a hard time keeping pace with the market, as the action has been so lopsided to the upside.
Nearly everyone is extremely aware that the major indices are extended, but this is in large part due to bigger-cap names like Apple (AAPL) and Microsoft (MSFT) . There actually are quite a few smaller stocks that are not widely extended like their big-cap brothers. The Russell 2000 small-cap index (IWM) is in the best technical shape of the major indices.
Will the market use this virus scare or earnings reports to produce some much-needed corrective action? Will the dip buyers stay extremely stubborn and prevent a pullback from gaining any real traction? Those are the two big questions we are dealing with Tuesday morning.
It is unlikely that dip buyers will give up easily, but they may hesitate a bit and let things come in. It is going to take some hard work to hurt this uptrend, but that doesn't mean that we shouldn't make sure we have stops in place and don't let positions pull back.
There are quite a few cross-currents out there, but the Fed-created liquidity has been the only thing that matters -- although that doesn't mean that the indices are technically healthy.