What Comes After Market Euphoria?

The strong post-election momentum for the market continued on Monday, but there was some slowing and pockets of profit-taking. Bitcoin IBIT and Bitcoin-related names were the leaders, and they closed near the highs of the day, with IBIT gaining a very healthy 13%. The Russell 2000 IWM small-cap index also did very well with an increase of 1.5%, which pushed breadth from 5,500 gainers to 3,900 decliners.

Bigger cap stocks did not do as well. The Nasdaq 100 QQQ suffered a small decline of 0.15%, and if it wasn’t for a gain of over 8% from Tesla TSLA the Magnificent Seven MAGS would have been in the red.

Investors and traders are becoming more selective as a large number of stocks are becoming increasingly extended. There is still a willingness to chase Bitcoin and some speculative small-caps, but other themes are seeing some profit-taking now. For example, biotechnology IBB reversed hard after a big run over the past week.

The question now is, what comes after euphoria? It is highly unlikely that there is going to be a sudden collapse. There will be more profit-taking, but dip-buyers should provide support. Stock pickers will become more active and try to find the names that are still good values and aren’t too technically extended.

The easiest mistake to make in this sort of market is to assume that there will be a sharp downside reversal. These sorts of markets tend to stay sticky to the upside for a while. It is only after dip buying stops working and the market stalls out that deeper corrective action starts to build. While there is always the risk of surprise news, there doesn’t seem to be anything on the horizon at this point.

Stay with the trend until it ends, and don’t worry too much about trying to call a market top.

Have a good evening. I’ll see you Tuesday.

At the time of publication, Rev Shark had no positions in any securities mentioned.