Market Looks for Direction
12/1/2005 9:17 AM EST
"If I look confused it is because I am thinking."
-- Samuel Goldwyn
Market action has been a bit confused the past couple of days. The indices have drifted lower but without much conviction and we have had a peculiar mix of leadership and weakness. Although some of the recent momentum favorites have faltered, many of the semiconductors and speculative small-caps have acted well. Energy, commodity and steel stocks have also shown some relative strength while banking and retail have lagged.
The market has simply looked confused and uncertain after a big run for almost the entire month of November. Everyone was aware we needed a rest and some consolidation but once it started, there was speculation about whether this was really the beginning of the end of the rally, and not just a pause.
A market as strong as this one since mid-October is unlikely to suddenly roll over and go straight down, especially without any major negative catalysts. The greater likelihood is that a top won't come until the market retests highs and the bulls are disappointed a few times with the market's inability to follow through.
Technically the indices are still in a strong uptrend. It will take more than the past couple days of lame action to turn the tide here. However, that doesn't mean you shouldn't be prudent and take some profits, particularly in extended stocks. On the other hand, there certainly is no good reason to be very bearish at this point. The trend is still up. Although there are some cracks in the market, we don't want to be overly anticipatory, and the action this morning is a good example why.
We have a very strong open shaping up. Overseas markets are very strong, and the dollar is moving to a multiyear high. The European Central Bank has raised rates for the first time in many years. Although that was widely anticipated, it seems to be the main driver this morning because it indicates that the worldwide economy is indeed doing well because this hike was sparked by inflationary concerns.
November retail sales numbers are out and the market seems to like them. Frankly, they don't look that good to me except for Wal-Mart (WMT:NYSE), whose numbers were expected. There are disappointments from AEOS, COST, JWN, KSS, and TGT. If this early market strength is because of optimism about retail, I'm skeptical it will last.
The past two days we have opened strong and fa
ded. We have another strong open this morning. Will the bulls be able to keep it going this time?
