Let's assume that we do get a pullback either this week or after expiration early next week. What type of pullback is it likely to be?
While the fact that the market has become so overbought is a negative in the short term, it typically signifies underlying strength and means that there is a good chance we at least retest this area again after a pullback. Additionally, hedge funds have de-risked and there are likely a lot of underperforming eager beavers ready to buy the first dip.
The bears can make a case for something bigger. The Deutsche Bank and Petrobras offerings in the coming weeks will mean over $40 billion in new supply and thus far there has been a lot of talk but no mega mergers to offset the supply. Additionally, momentum based quant algorithms have been pushing the market too far in whatever direction the market happens to be going in, so breadth readings are less reliable.
I am leaning towards the idea of a shallow pullback followed by another rally. That is a large part of the reason I am hesitating in going short. I do expect a pullback at some point soon, but I'm not expecting that much from it so I want to make sure that I at least get a good entry point.