Rev Shark:
Expect Opening Spike in Market Up Without Rest
11/17/2005 8:50 AM EST
Just as a cautious businessman avoids investing all his capital in one concern, so wisdom would probably admonish us also not to anticipate all our happiness from one quarter alone.
-- Sigmund Freud
The biggest danger this market faces is that it not take the time to consolidate gains. When stocks or markets go straight up, they have a greater tendency to come straight down. As the profits mount in a runaway market, the greater the rush for the exits will be when things turn.
The great dilemma that investors face is how aggressive to be in riding the wave of momentum while managing risk as the market becomes increasingly extended. While we don't want to be overly anticipatory and miss further upside, in a strong market we also need to be cognizant of the increased risk the higher the market goes without taking a rest.
There is no easy solution to this problem. Our best hope is to stay vigilant and be prepared to move quickly as conditions warrant. Yesterday I discussed watching the market internals such as breadth, new highs, new lows, sector leadership, volume and so on. Those indicators were flashing some warning signs Wednesday that weren't reflected in the overall market action.
But this morning the market is shrugging off its concerns and is set to spike higher at the open. The only news I see to account for it is very strong action overseas, particularly in Tokyo, where the Nikkei is up close to 2%. This sort of strength to start the day worries me, especially if it is due mainly to sympathy with the Japanese market. There has probably some short-squeeze component to it as well, but it seems it's the overseas strength that is the main driver.
The earnings report from Applied Materials (AMAT:Nasdaq) is not being warmly greeted, and we need to watch to see if that has any impact on semiconductors. Gold is strong once again. I mentioned in my opening post yesterday that the group was looking ready to go and now it looks like momentum is kicking in. Gold at $500 per ounce doesn't look like an unreasonable target.
We have some tricky trading ahead of us. This market sure could use a rest, but it isn't taking one, and that makes the bears and underinvested bulls very anxious and keeps things from dipping. You have to be thinking about shorting this open given these circumstances.
Weekly unemployment numbers are out and dropped to almost 300,000. That is good news for the economy, but maybe not so good from an inflationary standpoint. Housing starts look to be roughly in line and the market has barely blinked.
Position: No positions in stocks mentioned.
Gary B. Smith:
