On Friday, the S&P 500 fell hard – 26.12 points in fact – enough to pierce a little way through the uptrend that has been in place since October. But within all the downside action there were a few rays of light.

For one thing, small stocks dramatically outperformed the big caps. We haven’t seen that kind of relative performance in quite a while, and it suggests the downside potential of the market is relatively limited.

Another positive is the level of specialist shorting, which remains consistently low. Low specialist shorting has been a hallmark of the market for many months now. And while it doesn’t foretell of big gains necessarily, it does suggest big losses are unlikely.

Even more good news was the big drop in Google. Over the course of last week, Google shares fell $66.79, or nearly 15% from their recent high. This may not seem positive to those who own stock in the search engine giant. But Google has served as a key indicator lately, measuring the level of excess speculation in the market.

Usually, stocks thrive better in an environment of pessimism than optimism. At least, they are a much safer bet during those times. So whenever we see signs of “irrational exuberance” it makes us nervous. A few updates ago, we were alarmed by the case of a broker who was talking his 80-year-old clients into switching out of safe income stocks and into Google. Perhaps now there will be a little less of that kind of overly optimistic advice.Read more...