Generally when markets reach levels of extreme pessimism, as they did two weeks back, the pendulum tends to swing back in the other direction. Last week we saw investors begin to embrace the rally but there were still signs of hesitancy. This morning we are seeing the pendulum swing further towards optimism with the proximate excuse being China revaluing the Yuan.
After two weeks of rallying the market is finally becoming overbought in the short term just as sentiment is beginning to support a move lower. Even if the market is going to rally through the turn of the month there is still room for a pullback in the coming days. Chasing the market at this point does not seem like a low risk trade. I am also hesitant to go short for two reasons. Sentiment is not yet extreme and I am looking to take it easy this week so I will only be taking the highest risk/reward trades.
The bears will be happy to know that Jim Cramer has finally turned bullish. It was highly unlikely that we would see a top with Cramer bashing the rally everyday. This is a necessary ingredient for a top.