Following new all-time highs for the S&P 500 and Nasdaq on Thursday, stocks are set for a weak open here on Friday morning. Both IBM (IBM) and Intel (INTC) are seeing a poor response to their earnings reports. However, the bigger problem is that too many stocks are technically extended and there isn't any immediate catalyst from fiscal or monetary stimulus.
Even Investor's Business Daily, which sticks with uptrends until they end, notes that the Nasdaq "remains sharply extended from its 50-day moving average, so a pullback is a definite possibility."
There are some headlines that the market is weak this morning due to virus concerns. That is a nice, neat explanation for some selling, but what is moving this market is technical action and sentiment. The most important issue impacting market movement isn't politics, economics or Covid. The most important issue is sentiment of retail investors and their willingness to continue to aggressively trade individual stocks.
There are good arguments to be made that there is a bubble in certain parts of the market. However, simply recognizing that issue doesn't mean the market is on the verge of a major collapse. The very nature of bubbles is for them to continue far longer than seems reasonable.
A bubble is hard to navigate, and it creates a tendency for people to keep trying to predict a top. This results in every pullback in the market being characterized as the start of a major turn. The reality is that healthy markets need periods of consolidation and weakness along the way. That is just the natural ebb and flow of price action, and it isn't necessarily significant.
Yes, the market and many stocks are extended, but there isn't any real change in market character yet. We must continue to watch to see how aggressively the dips are bought, and we need to watch to see if selling into strength becomes more aggressive, but if you are looking for clear evidence that today is the day the market finally tops out you aren't going to find it.
For quite a while, my game plan has been to do some partial selling into strength while continuing to look for good entries, primarily in smaller and lower-priced stocks. With earnings season starting to heat up there should be some interesting movement in individual names. There is too much action under the surface to characterize this market by looking simply at the major indices.