Nearly everyone agrees that recent market action is so hot that it can't be sustained for long. One large group of market players believes this action is a setup for an eventual collapse while another large group believes an uptrend can continue for quite some time.
Both bulls and bears are trying to figure out when this market will rest but no one seems to have any clue when the action might cool off.
In view of the extended technical conditions, we must look at the coming news flow as a potential catalyst for a shift in the market action. Here on Tuesday morning several big banks kick off earnings season, with Wednesday bringing the formal signing of Phase One of a trade deal with China.
Typically, a market as extended as this one would be an ideal setup for a "sell the news" reaction to a well-anticipated event such as earnings or a China trade deal, but the dynamic driving the market right now is fear of missing out. That fear causes a rush to buy on any minor weakness. Many market players hate the idea of chasing the indices at all-time highs, but they are willing to buy very minor pullbacks as a way to enter.
The biggest mistake to make is to think that the market is going to start acting in a reasonable way. "Reasonable" is typically defined by market participants as something that they understand. They don't understand how this market can continue in the same manner for so long.
The bulls understand and embrace the idea that the Fed has created a giant wave of liquidity and that is what is causing this bubble-like action. That force is more powerful than anything and makes things such as valuations, fundamentals and overbought technical conditions irrelevant.
At some point a shift will come and there will be some news event such as earnings or China that will be used as an excuse, but the real reason will be a slowing in the liquidity that the Fed is providing.
The numbers are already out for JPMorgan Chase, which along with Citigroup are holdings of Jim Cramer's Action Alerts PLUS charitable trust. The company posted earnings per share of $2.57 versus expectations of $2.36 with revenues well ahead of expectations as well. The stock was trading up around $1.60, or 1.2%, about 70 minutes before the opening bell.
The question now is how aggressive market players are to chase a strong report after a big rise in JPMorgan Chase since the last report back in early October.
This market has some powerful momentum right now and the force of a friendly Fed behind it, but it is frothy and extended and the action can't last forever.