One of the most fascinating aspects of a stock market bubble is how traders and investors justify the action. They are making money and feeling confident, which causes them to believe that the action can last forever, and if it does end they will be able to escape with little damage.
The narratives about the outrageous valuations, terrible economy, and extended charts are ignored because they don't conform with the price action. Why worry about those things when you can make money by ignoring them?
When the market top does eventually come there will a strong inclination to believe that it is just a temporary setback. However, many bulls will end up trapped and will sit frozen and uncertain as stocks start to trend down. They will continue to believe that all those negative arguments still don't matter even when they do start to matter.
There is no great mystery about what will happen. The pattern is a function of human nature and will play out in largely the same way it did back in 2000. The great difficulty is predicting when it will happen. Bubble action can continue for months and it always continues longer than seems reasonable.
Navigating this market is a balancing act of aggressiveness and caution. We want to keep taking advantage of the opportunities that some market players think are irrational but, at the same time, we want to protect our gains zealously and keep our accounts as close to highs as possible.
It is a fascinating market environment right now with stocks in China going crazy as retail investors light up the indices, FAANG stocks climbing to the sky, and small traders beating the bushes looking for the next hot play.
It is impossible to predict when this comes to an end so the secret to navigating this market is to stay focused on price action. Price action will tell us when the negative arguments are starting to matter. Price action will influence sentiment more than anything else and at some point, negative momentum will feed on itself.
I noted Wednesday that I had started some index shorts after the indices reversed intraday and went lower. It was a mistake to act so quickly on relatively minor weakness. I still have the position and may take a stop if the uptrend gains strength again but I'm only going to add to it into weakness. If I'm going to short this market I will do so only on weakness and not strength.
We have some minor selling to start the day but there continues to be strong underlying support.