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Wilde Bulls

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If the market falls from too high after too long, its eventual correction would resemble a bear market, perhaps even triggering one.

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Minyan Michael Santoli makes an interesting point this week in Barron's Streetwise column: "Bullish Sentiment: Wide, Not Deep."

Oscar Wilde (or, was it Shaw?) once said something similar - paraphrasing here: "It matters not what one believes, so long as he does not believe it altogether."

My daily market analysis at AvidTrader also has noticed what Santoli describes as the tape acting "like a machine for converting most every headline into a reason for buyers to keep buying." That's why Thursday's go-nowhere day was so much more interesting than its tape action, which barely responded to seemingly bullish data.

That was certainly abnormal for the headline-into-rally machine. It's not certain whether the machine has been broken, or is just briefly out for repairs. In fact, after falling at Friday's open on PPI and Housing Starts, S&Ps bottomed on Consumer Sentiment. And this morning's opening drop wasn't instigated by any report - which could be considered normal for a working machine. Of course, S&Ps aren't rushing to recover from new relative lows that followed 10:00am's Investor Confidence Index.

Santoli also notes that "dips have been shallow and brief" and leaving bottom-fishers behind. Higher highs and higher lows do make an uptrend, albeit an insecure trend when corrections are short and shallow, expending as much buying energy as they create. That pattern is perfectly acceptable now and then, but too many consecutive short and shallow corrections can take price too far above where bargain buyers might stop a decline, let alone reverse it.

Eventually a pullback isn't short and/or shallow, and its depth and length are greater than just one or two degrees. The first drop is rarely the drop, which tends instead to follow a short and shallow new high. This pattern might already be developing, starting with Friday's quick dip that proved not to be "a real bruiser." This morning's drop might be another warning shot, while an actual top is probably waiting for a slightly higher high that reverses down to new relative lows through a relevant timing window.

Regardless of when or where, every trend of any dimension or degree requires a real correction that dips under prior highs, and under prior lows, spending some serious time weeding out weak hands.

As Bill Shakespeare once said (ghost-written by me): "Rose-colored glasses by any other name are still rose-colored." If the market falls from too high after too long, its eventual correction would resemble a bear market, perhaps even triggering one.
No positions in stocks mentioned.
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