Rev Shark:
Too Early to Know, so Beware
11/16/2005 8:44 AM EST
"There comes a pause, for human strength will not endure to dance without cessation; and everyone must reach the point at length of absolute prostration."
-- Lewis Carroll
The bulls have been disco-ing faster and higher since mid-October but as we approached the highs we hit back this summer with nary a pause it was time to take a little rest. The question now is whether this is just a brief pause that refreshes and allows the party to continue, or the beginning of absolute prostration and the meltdown the bears assure us is inevitable.
It is too early to answer that question. The profit-taking yesterday did nothing to change the technical picture, and it was expected and even welcomed by many bulls. What we have to watch for is whether it is going to scare more folks into locking in profits and start a waterfall pullback that breaches key support levels. When profits start to disappear, many traders will lock in their gains and head for the sidelines.
The key here is the dip buyers. Will the folks who missed out on this rally be willing to step up and buy weakness? Buying a pullback always sounds like a great idea when the market is going up but many have second thoughts when real weakness occurs. It is natural to worry that the pullback that you hoped for will turn into something worse.
It is very important to watch market internals at this point. What groups are showing relative strength, how small-caps are acting, breadth, high-beta stocks demand, volume, and so on. If the internal action deteriorates then we will know that we may be in for a more severe correction.
At this point there is no reason to panic. The trend is still solidly up, the indices are in good shape technically, and seasonality continues to favor the bulls. That doesn't mean we shouldn't increase our caution levels but don't be too overly anticipatory in expectation of the end of this party.
CPI data are out and not generating much of a market reaction so far. Business inventories were a bit higher than expected, which is troublesome but the market doesn't seem very concerned at the moment.
We have a flat start on tap. Overseas markets were mixed, oil is down again and gold is perking up. Keep on eye on those gold stocks -- they are building some interesting charts.
Gary B. Smith:
