STRUCTURAL DAMAGE AS A RESULT OF BULLISH EXUBERANCE EXPLAINED
I made a post on Twitter earlier saying the following: "we're at a point in this rally where any further gains will only serve to make the coming correction/consolidation more violent & unpredictable".
I want to explain the logic behind this analysis.
Over the weekend, I made a blog posting demonstrating why the bulls need to slow their roll, pointing to a few different charts and indicators that are showing bullish exuberance and just plain overextending to the upside for some important leaders in the market.
As the bullish case grows in popularity, we can expect more participants to jump aboard the train. This is a positive phenomenon generally speaking. However, it becomes highly detrimental during the late stages of a rally, as it serves to weaken the overall foundation or integrity of the rally.
How does it weaken the foundation? By pulling ardent bears and stubborn side-line cash off of their asses and injecting them square on into the marketplace. The bears cover their shorts, the side-line cash buys AAPL, INTC and PG...and the market continues moving forward at a torrid pace.
The foundation becomes weak as a result of these reliable bidders during market corrections no longer being available. They have now turned into potential sellers if things do not go their way. Remember, these guys were the last ones to the party, meaning they were the most stubborn of the non-believers and will be easily swayed back into the non-believer role with any market weakness.
And what happens when weakness does finally come around? We get a vacuum of bids...they simply disappear, as the last of the non-believers becomes a buyer and is no longer capable of bidding, but instead is offering shares.
That is exactly how corrections that should be tame and orderly, turn into street riots where molotov cocktails fly and ordinarily level-headed men turn into maniacal, fear-ridden loons.
