The second trading day of 2020 is looking to be even more dramatic than the first day of action.
Gains accelerated on Thursday as big-cap stocks such as Apple (AAPL) , Microsoft (MSFT) and Advanced Micro Devices (AMD) pushed to new all-time highs once again. The action was downright frothy in some of the leading names but under the surface, small-cap stocks were mixed and breadth were not nearly robust as the indices indicate. The Russell 2000 ETF (IWM) lagged badly but the mighty Apple didn't even pause for a slight rest.
Friday morning news is hitting that President Trump ordered an airstrike that killed the leader of the foreign wing of Iran's Islamic Revolutionary Guard along with others. The Iranians are planning harsh retaliation and that may cause some lasting impact on the market. In the past when the U.S. has hit Syria and others, the market quickly rebounded but in this case there is more uncertainty because of Iran's history of aggressive responses.
It is very unusual to have a major news event like this hit at an all-time high and cause a major reversal. The indices and many stocks are very extended at this point so the news is actually a convenient excuse for much needed selling.
Typically markets that are at all-time highs don't suddenly reverse and go straight down. Tops tend to be a process with a series of dips and bounces before a major downtrend starts. Already Friday morning there is dip buying interest when the DJIA was indicated lower by 300 points or more.
Rather than be the catalyst for a major market top, the Iran news is more likely to be the catalyst for much-needed corrective action that will set up the market for more upside down the road. While the threat of Iran retaliation will create some uncertainty this news is not a major economic negative for the U.S.
As I mentioned Thursday, the best thing that could happen to the market at this juncture is a pullback that helps to relieve overbought conditions and sets up a foundation for a move higher when fourth-quarter earnings season starts in about two weeks.
I'm looking for some very active dip buying on this weakness. I'd prefer some fear and worry but market players are well conditioned to buy news of this sort very quickly.
The bounce has already started as I write but hopefully the selling will last long enough to help create healthier technical conditions.