A warning, or more of the same?

End of Day Update:

Tuesday gave us the first truly dramatic S&P500 session of the new year. We gapped higher at the open and briefly poked our head above 2,800. There was not a clear headline driving this strength and instead it appeared to be another wave of buying because other people were buying. But nine up-days turned out to be one too many and this time traders were more inclined to sell the strength than chase prices even higher. That early fizzle continue through the day, eventually pushing us deep into the red. All told, the intraday range spanned nearly 40-points and was the most volatile day in months. Volume followed the volatility, turning this into the highest volume day of the year by a big margin.

In an ordinary market, this gap higher and subsequent fizzle would be a huge red flag and a strong short signal. Unfortunately this is not an ordinary market and normal rules do not apply. We’ve seen horrid price action over the last few months, but prices rebounded decisively within days, if not hours. Today’s fizzle is still a significant concern, but shorting this market based on technical signals has proven to be quite costly. Today’s reversal could be the start of a near-term dip in, but without a bearish headline catalyst to drive fear into otherwise confident bulls, I don’t expect this selling to go very far. Complacency will eventually get us into trouble, but over the near-term confident owners keep supply tight by refusing to sell every bearish headline and any negative price-action. I don’t expect today’s reversal to dampen bulls’ conviction and if they refuse to sell, then it is much harder for a dip to take hold.

That said, at some point this unsustainable climb higher will falter. There is only so much money willing to chase these record highs even higher and today’s reversal suggests we are getting close to that point, at least over the near-term. At best we consolidate recent gains by drifting sideways for an extended period of time. At worst, we stumble back to 2,700 support.

I don’t trust this market, but it keeps doing the right thing and that means we stick with it. Continue holding your favorite buy-and-hold positions, but keeps some cash on hand so you can buy any dips that come along. And if you are sitting on short-term trading profits, this is a great time time to start locking them in.

Jani