As traders reached for some caffeinated assistance in perusing the early morning headlines on Thursday, they probably were thinking that it might be best to play the game from the short side. Once again the news flow bordered on depressing as Moody's had downgraded 30 Spanish banks, Portuguese 2-year bonds yields were soaring to their highest level since 1999, CDS spreads were blowing out, there were opposing tanks lined up in the streets of Yemen, there was steam coming out of a couple reactor buildings at Dai-ichi, and the mess in Libya continued unabated - this despite NATO forces announcing that the Libyan military had been all but destroyed.
So, what was the response to all of that bad news? Apparently it was, "Buy 'em!" For the second day in a row, traders simply shrugged their shoulders in response to the headlines and focused on the good stuff such as some strong earnings (Red Hat and Micron led the charge here) and continued improvement in initial unemployment claims. And by the time the closing bell rang at the corner of Broad and Wall, the question of the day was: Bad news? What bad news?
I know I've given our friends in the bear camp a hard time this week, but you've got to figure that it has been tough to be short lately. You see, just when it looked like the bulls were in trouble and most technical indicators were snapping like toothpicks, the bulls found a way to rebound when nothing horrific happened in Fukishima, Japan. And while the glass-is-half-empty gang didn't mind the quick pop, they probably are none too happy that the much ballyhooed "retest" of the lows has failed to materialize so far.
But since we all live in glass houses in this business, that's probably quite enough of the stone throwing for this morning. Our primary point is that the last six trading days has been a prime example of why it is soooo important to stay in tune with what the market IS doing as opposed to what you think it ought to be doing. I know I've said this more times than anyone cares to count, but it is vital to understand that this game isn't about being right - it's about making money. And the best way I've found to consistently make money in the stock market is to check your ego at the door and try to figure out what is driving prices each and every day.
While it would be easy to suggest that the recent tape action as well as Thursday's close above an important resistance zone is likely to lead to higher prices (and that the end-of-quarter window dressing may also lend a hand next week), we would be remiss if we didn't point out that the banks have been a real drag on the market lately. And the bottom line is if the BKX doesn't perk up pretty soon and join the party, our furry friends might just have something to hang their hats in the near future.
From a chart standpoint, it is clearly positive that the S&P, Dow, and NASDAQ all managed to break through their respective lines in the sand Thursday. But let's also keep in mind that the volume hasn't been stellar, that many of our internal momentum indicators aren't exactly singing a happy tune at the moment, and that the recent highs would be a logical point for the bears to try and get back in the game. So, while it has been enjoyable to see some green on the screens over the past week and a half, we would advise holding off on ordering the party favors for a while longer.
Sticking with the technical theme for a moment longer, the boys in the bull camp have been pointing out this week that the sentiment indicators have backed off of their extreme readings recently and that the market is no longer overbought. In short, this means that if traders decide to continue shrugging their shoulders and mumbling "what bad news?" these indicators suggest that there might be some room to run.
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