Rev Shark:
News Hasn't Changed; Traders Have
1/21/05 8:22 AM ET
"No change of circumstances can repair a defect of character."
-- Ralph Waldo Emerson
From August 2004 to December 2004 there was little that could stop the hard-charging market. Rising oil prices, interest rate hikes, a weak dollar, the presidential election and continued strife in Iraq had no lasting impact on the market. All news was either good or ignored as we moved steadily higher.
January 2005 delivered a substantial change in character of the market. All of the worries and concerns that had been ignored for months started to have an impact. Good earnings reports have been treated as an opportunity to sell. Bad news is cause for a stock to be destroyed.
What investors need to keep in mind now is that it isn't the news or fundamentals that are important. The character of the market is defective and it will take more than the news wires to change things. The temptation is to seize on a good earnings report, a merger, falling oil or any number of things to justify some buying and our hope that the market will return to the bullish action of 2004.
What we need to keep in mind is that it isn't the news itself that is the problem. The problem is that the character of the market doesn't support buying. We are in a period where market participants are inclined to sell regardless of news or fundamentals.
This won't last forever. Sooner or later the character of the market will shift again. What we need to do is look for signs that indicate the inclination to sell for any reason at all is waning. The best example of that is when stocks stop going down on bad news. When bad news is bought then we will know that the worst is over but that isn't always as easy to see as it sounds.
I speculated yesterday that maybe the bad news from eBay would bring us to the point where the market was sufficiently washed out that we may see a bounce, but it didn't happen. We closed at the lows and showed few signs that the decline was slowing although the pullback is now quite substantial. We will probably still get a bounce in eBay at some point but that doesn't mean the bad news is being bought. It just means that traders are looking for a play.
This morning we have some early strength driven by generally good earnings reports from the likes of General Electric (GE:NYSE), Checkfree (CKFR:Nasdaq) and KLA-Tencor (KLAC:Nasdaq). However, we need to keep in mind Mr. Emerson's statement above. News alone won't repair a defective character. Investors have to believe that a real change has taken place and it is not easy to shift the thinking and mood of the market when it is as disenchanted as it has been recently.
This is a market where a bounce is viewed as an opportunity to escape -- it's not viewed as a change in character. We need to be extremely careful about trusting a bounce, especially when it occurs at the open. Also, we need to keep in mind that today is option expiration, which may cause some random action. We have also seen short-covering the last couple of Fridays after a poor week and we may be set up for that once again.
Early indications are good. Oil is up a bit and overseas markets are weak but the focus is on the positive earnings reports. Proceed with caution. Don't be too quick to believe a market with character as poor as this one.
Gary B. Smith:
