Wednesday, February 2, 2011


It was a very quiet day of trading. The indices saw little movement, breadth was slightly negative and volume slowed. Whether that action is positive or negative depends on your individual perspective. The bulls will say that it is a healthy consolidation after a big move. The bears will argue that there was no follow-through and that momentum must be fizzling.

Since the trend is still up and we are hovering near annual highs, we still have to give the bulls the benefit of the doubt. The "first day of a new month" manipulation does somewhat diminish yesterday's breakout, but, so far, we haven't given much of it back. I'm not convinced that yesterday's action was a signal that the market is back on track.

The biggest problem I see with the market right now is that there are simply too many extended stocks that are in need of a rest. There aren't any glaring negatives out there but, with seasonality turning negative and earnings season winding down, I would be very surprised to see this market move straight up with hardly any pullbacks (like we saw in December).

I am worried that trading the upside is going to become increasingly more difficult. The market recovered too quickly from last Friday's weakness for stocks to have a chance to rest. Some flat action might take care of that.

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