In order to move higher, healthy markets need to rest and reset periodically. Pullbacks, like we see Thursday, can be the start of a topping process, but there is an old saying that “tops are a process.”
Markets — especially those that have had runs like this one — don’t just suddenly collapse. The main reason is that very strong markets create a large supply of people that have missed out. Prudent investors often don’t like to chase strength. They prefer to buy pullbacks and will look for entries at support levels.
Dip buyers tend to repeat their behavior over and over until they lose several times. That is when deeper corrective action usually occurs. In the current market, we have not had any meaningful failed bounces in quite a while. There is no great fear at this time that stocks won’t come back from a pullback.
Quite a few market pundits compare the current market to the bubble that occurred in 1999-2000. While there are similarities, there are also some major differences. Valuations in some places are quite extreme, but there are always stocks that look extremely expensive. The focus on sectors such as SPACs, cannabis and bitcoin, but persistent themes are nothing new either. This market rode the FATMAAN theme for many years, and that didn’t lead to as many dire warnings even though it was much narrower and overstated the true nature of the market’s gains.
There is no value in trying to characterize this market as a bubble. That implies that there is going to be some sudden collapse, and many people will be wiped out. That is not a certainty. We will go through cycles of ups and downs, and there will be many rotations, but after some corrective action, I expect to see many stocks in this market continue to trend higher.
Today is a day of rest and reset. That is a good thing. It is important to maintain a positive mindset and be ready for the next trade. I see many good stocks out there that are bouncing around due to some downside volatility. That is the sort of opportunity from which the next trade develops.
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