Markets that go straight up tend to create a large supply of dip buyers. That is why it is often said that a top is a process. It takes a series of dips and failures before selling momentum picks up.
This morning we had a good illustration of how aggressive dip buyers can be when the market has been going straight up. The indices gapped higher but then sold off for about 30 minutes and actually pushed the S&P 500 into the red for the first time in a while. That move lower was aggressively bought and produced a V-shaped bounce that hasn't quite managed to take the indices back to the opening highs.
The abruptness of the dip buying shows how much anxiety there is among market players that have been trying to keep pace with this straight-up market. It has been almost impossible to find prudent entry points when the action is this lopsided.
What complicates matters is all the cross-currents that occur at the end of the year. There is not only tax planning and window dressing but there is positioning that has nothing to do with fundamentals of technicals. There are some market players that like to go completely to cash at the end of the year and then start fresh next year. This usually leads to some bouts of profit-taking in the last few days of the year.
While the indices and many stocks are technically extended here that doesn't mean they are going to suddenly reverse and go straight down. The market doesn't have to collapse just because it has become a bit frothy. It can deal with that with shallow pullbacks and churning.
There is often a tendency to look at the market in black-and-white terms. It is either widely bullish or on the brink of disaster, when much of the time it is in the middle ground and just needs some rest.
I'm primarily focused on managing my position right now and making sure I don't give back too much of recent gains. With the market so extended at this point there just isn't much opportunity to buy but there still isn't a good reason to sell some stocks that still look technically healthy.
The best thing that could happen at this point is that we have a good bout of selling, but the market doesn't seem to care if that is a good idea.