The market action Monday was a perfect example of what you look for to indicate a short-term market top. As I've been discussing, the key issue for reactive traders is to spot an intraday reversal and a poor close. That will be the primary tip-off that further problems await.
The intraday reversal Monday was exactly what we have to watch for, but what was interesting was that the setup for this was nearly perfect. There were a number of target increases in the FAANG stocks in the morning and Tesla (TSLA) was trading much like Yahoo did back during the 1999 to 2000 internet bubble. TSLA ended up with a 300-plus point trading range and trapped legions of bulls that were chasing the momentum.
The reversals and selling pressure were also quite intense in some of the hot groups like electric vehicles and special purpose acquisition companies. Breadth ended the day with around 2,700 gainers to 4,650 decliners, which isn't bad, but it was the magnitude of the reversals, and not the point loss, that is the big issue. The Dow ended the day in positive territory, while the Nasdaq went from hero to down 1.23%. The Nasdaq 100 -- PowerShares QQQ Trust (QQQ) -- was up around 2% to a new all-time high and then reversed to close down 1%. The only other time that has happened was on March 7, 2000, when the internet bubble burst.
The big question at this point is "what comes next"? Is it all downhill from here? There is no question the market has become frothy and extended and needs to work off some of the excesses, but much of what has driven this market has been very narrow. The average stock is not that overbought and that means there is likely to be some rotational action.
Also, keep in mind that this has been a market driven by stock picking. I'll be looking for nimble and astute traders to find other opportunities, but the more correlated the selling the more difficult it will be.
We will see tomorrow if the bears can build on this reversal. They have the advantage, but I expect that the dip buyers are already eyeing some names they want to jump on and will be providing some support.
Don't forget that earnings reports will start to hit with the big banks leading off. These reports will add an interesting element to overall market sentiment.