The market has been on a nearly straight-up trajectory since hitting bottom on Dec. 24. Since then, there has been only one notable day of selling (Jan. 3) and just one brief period of consolidation, from Jan. 22-29. Otherwise, there has been good momentum and a solid uptrend.
This action has helped to restore the bullish sentiment that served the market so well before the fourth quarter of 2019, but it would be a mistake not to contemplate some sort of market pullback in the near term.
Earnings season starts to wind down this week after Alphabet Inc. (GOOGL) reports after the bell here on Monday. There are still plenty of smaller companies that will report, but the bulk of the S&P 500 is finished.
While there have been some solid reports this quarter, such as the one from Facebook Inc. (FB) , the main theme has been "better than feared." Companies such as Apple Inc. (AAPL) benefited from low expectations, but the big question now is how far they can run when the market starts to worry again about actual growth.
The main catalyst for this uptrend has been the Fed's dovish turn. Fed Chairman Jerome Powell did a 180-degree turnabout in the last two months and that was enough for the market to completely ignore the government shutdown and a number of other worries.
Not only is the Fed accommodative, but the jobs news was surprisingly strong for the month of January. It is the best of both worlds for the market with an economy that still looks quite good and a Fed that is preparing for a slowdown and isn't worried about inflation.
Technically the indices are extended, but they have been for a while. There has been some consolidation that has kept things from becoming too oversold, but the big issue going forward is how long the indices stay sticky to the upside.
While it is quite easy to argue that the indices need a rest, the difficult thing for the bears is whether that rest takes the form of some flat action or a pullback. Those bears who keep looking for a drop repeatedly end up as short-squeeze fuel.
The market has enjoyed a number of strong positive catalysts since the Dec. 24 low, but now those catalysts are starting to come to an end. Earnings season is winding down, the Fed can't get any more dovish without cutting rates, economic news appears to be about as good as it gets and the indices have gone from oversold to overbought.
As is so often the case, the bearish argument is very easy to make right now, but the price action is not confirming it. Until the market starts to act like it is running out of positive catalysts, we shouldn't assume there aren't forces that will keep it running higher.
Just because we can make a compelling argument for why the market is due for a rest or pullback doesn't mean we should act on that believe. Stay focused on the price action; when that shifts, then it will be time to shift how we are positioned.