Some Positives, but Caution Still Called-For
By Rev Shark
RealMoney.com Contributor
6/22/2006 9:15 AM EDT
"There are two kinds of people, those who finish what they start and so on."
-- Robert Byrne
Over the past week the major indices have started to produce better technical action. We had a big point move on good volume and breadth a week ago and then after a few days of backing and filling we followed it up with a halfway decent follow-through move yesterday. Volume was a bit light and we faltered into the close but we still managed a decent day.
Is this recent action the start of a better and more lasting market turn or just another painful "learning" experience for the hopeful bulls? Anecdotally the trust level in this market seems to be quite low, which is certainly understandable with the Fed lurking about out there with constant talk about inflation being at uncomfortable levels. However, we do have to consider the possibility that the recent market pullback has priced in more interest rate hikes. Certainly the market is no longer optimistic about a "one and done" scenario, but how much more tightening has been discounted?
The other potential market driver out there is earnings. We saw yesterday how a couple of good reports from the likes of Federal Express and Morgan Stanley improved the market mood. Unless business has fallen off a cliff in the last couple months, there should be a number of other companies with badly punished stock prices that will produce some good reports as well. This market pullback has been indiscriminate, crushing good and bad stocks alike. As earnings season approaches, they should begin to sort themselves out and reward astute stock pickers.
So the question remains: Are we in the early stages of a market upturn or just setting up for another ugly pullback? We obviously can't know for sure but what we can do is make sure we keep a close eye on recent lows as key support levels, and monitor the ability of stocks to make higher highs and higher lows. It is foolish to embrace the idea that the worst is behind us but it is equally foolish to be so pessimistic that we don't consider that possibility. Hence we need to keep a very short-term perspective right now while we consider the action.
The FOMC interest rate decision next week is going to be the next key market event. It is widely anticipated that we will see a quarter point interest rate hike but the importance of the event will be the accompanying policy statement. That is the primary focus of traders right now and it is what they will be positioning for over the next couple days.
We have a flat start to the day. Overseas markets were mostly higher. There is some merger and acquisition speculation from analyst in the telecom sector. Oil and gold are trading up.
At the time of publication, De Porre had no positions in stocks mentioned, although holdings can change at any time.