On Friday the market was hit with news of a U.S. airstrike that could lead to an ongoing military conflict with Iran as well as economic data, in the form of an ISM report, that was the weakest in a decade.
With the market extremely extended after some frothy action in big-cap names on the first trading day of the year, the stage was set to trap the bulls and send them scrambling for the exits.
That is not what happened.
Instead, the buyers immediately jumped in and bought the sharp spike lower. While there was some steady selling it was very orderly and there was strong underlying support the entire of day.
There was no panic or rush to sell the indices. Leading stocks such as Apple (AAPL) suffered only mild losses but there was some pressure at the end of the day on concerns that there could be a retaliation response by Iran over the weekend.
The market had great excuses to correct some of the excesses that have developed in the last few months but there is still too much liquidity out there and few places for it to go but into stocks. There is no great fear of being caught in a major pullback at this point.
There is still great confidence in buying pullbacks in strong stocks. At some point, those dip buyers will be burned and that will cause a top to form but it is not happening at that at this time.
The various pressures created by the changing of the calendar will now come to end and trading should start to become more normal next week. The movement caused by tax planning and portfolio positioning is over and the focus will be more on the merits of the market and stocks.
Technically, a pullback here is exactly what is needed. Stocks and markets are extended and there are a large number of warning signs flashing but a strong market tends to stay sticky to the upside. Many market players are looking for more selling to kick in next week, which would be ideal as a setup for earnings season in a couple of weeks.
Overall the market remains technically healthy. The bears had a chance to do some damage but could not muster any real downside momentum. The indices can afford to give back quite a bit and not suffer any major damage but the bigger danger is in rotational action in various sectors.
It has been an interesting start to the new year with two days of unusual action. The good news is that it is the sort of action that will lead to good opportunities down the road.
Have a great weekend. I'll see you on Monday.