We don’t expect a final top to form while everyone is worried about a final top forming. Not only do we need to see some high volume selling in the leaders, but we also expect to see negative breadth divergence. That is just not happening yet.

The market is climbing a Wall of Worry, but also a Wall of Money. With interest rates near zero, capital is flowing into assets that are moving, simply because they are moving. Momentum begets momentum; a self-fulfilling prophecy. It can’t go on forever, but it can last much longer than many expect.

Moreover, highly shorted stocks with weak fundamentals have been leading the market. Short sellers have to cover positions, which adds to buying pressure. Short sellers tend to be market professionals of various types. Some watch technical indicators and don't dilly-dally when positions move against them. Thus, highly shorted stocks have their sharpest rallies off the lows. Other short sellers are more fundamentally oriented, like David Einhorn, which means they might add to short positions in damaged companies on rallies. These folks contribute to the ongoing short-squeezes in shares of weakened companies like AIG or FSLR. Thirdly, there are the serial top pickers among active individual traders (the so-called dumb money). They provide the daily liquidity, or volume, necessary for fluid trading.

This 3-part dynamic operates in addition to, and independently of, optimism about a robust economic recovery and/or bargain hunting. It contributes greatly to the upside momentum and can last much longer than most people expect. In the year 2000, persistent short squeezes caused a number of bearish hedge funds run by very smart people to close their doors just before the top was in. Something like that could happen again. We expect to see some very smart bears, who will ultimately be proven right, throw in the towel just before a major market correction finally begins.