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Market Must Accept That Bulls Have the Upper Hand


The likelihood that we'll continue to run higher from here without some consolidation isn't high, but the simple fact is that the pricing action remains solid, and ultimately, that's the only thing that matters.

Over the past couple of weeks, the market enjoyed the kind of positive seasonality that short-term traders simply adore. Thin holiday conditions and a solid overall uptrend provided for some aggressive action in metals (particularly rare-earth stocks like Molycorp (MCP), Avalon Rare Metals (AVL), and Rare Element Resources (REE)), oils, and small biotechs; but probably the most striking aspect to the action toward the end of the year was the relative absence of many market-leading stocks.

A couple of favorites like Chipotle Mexican Grill (CMG) and Netflix (NFLX) showed some signs of distribution before they dipped below their respective 50-day moving averages, but the most striking failure has been Baidu (BIDU), which looks to be developing a head-and-shoulders pattern. However, while the broader market has pulled back a bit since Monday morning's hot start pushed the S&P 500 up against the upper end of its ascending channel, strength in names like Amazon (AMZN) and Apple (AAPL) have done a lot to cover up weakness in other areas. Other mega-cap Dow components like Alcoa (AA), Disney (DIS), and JPMorgan (JPM) have also helped the bulls' cause with strong technical breakouts.

Before we start thinking that it's all sunshine and butterflies, though, we need to remember that, in addition to the fact that the broader market remains extended to the upside, positive seasonality is waning and the level of complacency out there is remarkable. That doesn't make for a very attractive risk/reward profile, and individual investors need to be watching closely for signs of cracks under the surface.

Specifically, this market is in much the same position it was at this time last year before it hit a nasty air pocket. We kept floating higher as 2010 got underway, speculative action was high, and sentiment was at extremes. The "tell," however, was a big increase in volatility near highs and signs of heavy institutional selling in Google (GOOG). As such, I'll be keeping a very close eye on how those struggling market leaders act in the coming days and weeks, and will become very wary should we begin to see wild swings on a day-to-day basis.

The bottom line here is that the market has yet to do anything wrong. The likelihood that we'll just continue to run higher from here without some sort of consolidation isn't that high, but the simple fact is that the pricing action remains solid right now, and ultimately, that's the only thing that matters.

As always, there are plenty of reasons to argue against the action on our screens and be concerned that any new buy we make will surely mark the top. However, until there's some real weakness out there to support a more defensive approach, the only thing to do is accept that the bulls have the upper hand and act accordingly.

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No positions in stocks mentioned.
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