Overextended?

The market saw a little softness this afternoon, but, by and large, it was another day of gains. Investors and traders were downright ecstatic in early trading, but the market topped out after a few hours and then drifted the rest of the day.

Volume was lightest of the year and breadth was solid at better than 2 to 1 positive. Sector wise, the chips reversed after early strength and oil weakened as well. Regional banks were the leaders while natural gas was the laggard.

The biggest positive this market has going for it is the very strong momentum, which has created a large supply of underinvested bulls who are anxious to buy pullbacks. The biggest negative is that the market is extended, having seen approximately two days of correction in the last two months. The market has not offered good entry points for a while, and that makes it very vulnerable to a sharp pullback if those dip buyers lose their conviction.

Keep in mind that markets at their highs very seldom just fall apart. Market tops are processes that take some time to form (and we haven't even take the first step), so don't be overly anticipatory.

Going forward, the bears have two things going for them. Seasonality turns negative and we don't have much in the way of catalysts for potential positive news. There are still small-cap earnings reports coming in, but no major economic reports are due this week other than the weekly unemployment claims on Thursday.