After CSCO, More Weakness Ahead?

The indices didn't move much today, but we did have a more interesting mix of action. The dip-buyers jumped in three times today and were turned back twice before a good late run into the bell.

Under the surface, breadth was poor, but that was covered up by some big-cap strength. The Dow Jones Industrial Average continues to outperform in large part because some of the higher-priced stocks like MMM are doing well.

The DJIA is a priced-weighted index which results in IBM making up more than 10% of its total weight, simply because it is the highest price stock in the index. For that reason, I find the DJIA to be pretty useless as true indicator of market strength, but the media use it because it is what many people are used to. It continues to show the best relative strength, which is adding to the Teflon feel of this market.

The most important thing to keep in mind right now is that markets at their high seldom go straight down. Even if you are bearish, you have to expect some stickiness to the upside. Straight-up markets create a lot of underlying bids from folks who want to buy the pullbacks. Usually these traders have to be burned a few times before they lose their zeal to jump in on any weakness. This market has constantly rewarded dip-buying, and traders always stick with what works until it doesn't.

Given how lopsided the action in this market has been lately, even some minor weakness like we had today feels like a bear victory, but in the bigger scheme of things it is immaterial. This market could see much more selling before it would become unhealthy. We are still extended, and the risk of more aggressive profit-taking exists, but the tenacity of the dip-buyers must be respected.