As I mentioned yesterday, I was expecting a down/choppy day today. Markets got short term overbought and consistant with the sawtooth pattern of higher highs and higher lows we are seing, we got to the higher high point and so a decline today is to be expected. We are still a little overbought on a short term basis and given the disapointment with Intel after hours I believe another down day is in store. Bears shouldn't get too excited just yet...but given how overbought the market is on an intermediate term basis this is definately not the time to be brave on the long side either.
I'm in the camp that this current rally is a bear market rally, but I have to admit that the relentless nature of the rally smacks of bull market behavior...(let me be clear though...I don't think it's a bull market). In a bull market run off the bottom, pullbacks are relativily shallow, not giving longs the chance to buy in at the prices they want. This is occuring right now. Other prior bear market rallies have not been this relentless.
I remember the last bear market from 2000-2003 quite well and this rally reminds me of a mix between the post 911 crash bear market rally and the new bull market rally off of the March 2003 bear market low. The post 911 rally was V shaped and lasted until Janurary 2002 with a retest of the highs in March. That rally brutally shook out the bears, not only after the intitial thrust but also the mini rally in mid Feburary 2002 that led to the double top high. During that rally the economy was comming out of the reccession although jobs were still being shed. After 6 months of no material declines most bears were either too broke or gunshy to take advantage of the final leg down. I doubt bears this time around have the stamina to last for 6 months....not that I believe the rally will last that long....just saying. I'm already seeing serious signs of bear destruction and capitulation already only after 6 weeks.
The relentlessness of the this rally is reminiscent of the March 2003 rally. However, at the March 2003 bottom the economy had already well turned the corner and the first strong month of job growth occured about 4 months later. We are nowhere close to seeing job growth. At best we will get a decline in job losses. Thus, that's the difference economicaly between this time and March 2003.
From a sentiment perspective, it took the financial media about 5-6 months after the March 2003 bottom to ask the question "did we hit bottom?" as opposed to asking this question just 2 weeks off the latest bottom this time around which tells me there was not enough capituation and that there's still too much hope that the worst is over.
If markets give people the pullback they want, i.e. SPX 770-775 range....then this rally is likely finished and shorting strength from that point would likley be successful. But I'm still detecting a decent amount of skepticism/worry from sidelined money. People still want to see more evidence that things are improving and comming into earnings season there was quite a bit of fear that the market would fall apart on what is expected to be bad reports....the key word here is expected. If the market doesn't fall appart in earnings season then you might see a further unwinding of what I still think is a strong hold of skeptic holdouts that are itching to get back in the market but don't want to get burned again. A bear market rally will do WHATEVER IT TAKES to get people back in and shake out most bears.
I always try and guage what expectations are from traders, the financial media and mom and pop RRSP/401K investor. I learned that markets usually don't do what the general consensus expects it to do even it if seems so obvious. The consensus is usually either flat out wrong in the expected direction of the market or if they are right about it, their expectations get greatly exceeded. If the consensus expects a big move in the market and gets it right, then it's likely a blowoff type move which will result in a major trend change to eventually burn them badly.
I'm still not seeing all the ducks line up here to declare we have seen the high of the rally. Mind you, the ducks didn't all line up at the latest bottom either. When in doubt, I always let the market be the arbitrator. Until I see evidence of the bear taking control or a blow-off type upside move I won't attempt to take any IT positions and will instead chose to cherry pick for ST opportunities using small positions.
I will try to play to short side tommorow if a good setup presents itself.
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