Rev Shark:
Pullback Due, but We Could Run in the Meantime
11/7/2005 8:30 AM EST
"Now and then it's good to pause in our pursuit of happiness and just be happy."
-- Guillaume Apollinaire
With the bulls firmly in charge of the recent market action, the question now is when this strong momentum will pause, and to what degree. We have gone straight up the last few days and there is no question that we are overbought and in need of a rest.
The interesting thing about the market is that when it is extended, there often is strong psychology at work to keep it that way. Market participants don't look at the indices and think, "This is bound to pull back and then I can load up." They look at the indices and think, "Argh! I missed out on a huge rally and I better put some cash to work now so I don't miss out on more."
On the other side of the equation there are quite a few folks who have some hefty recent profits to protect. If they start to slip away, we can see a sharp spike down as everyone rushes for the exits at once. However, if there are enough folks with idle cash on the sidelines they will step up quickly and keep the dips contained.
A lot of bears out there are going to tell us that this move is silly and the bulls are idiots. In the ursine world, bulls are always goofs who are simply ignorant of the long list of negatives that is sure to drive this market to new lows soon. They tell us this move can't possibly be sustained so we better sell now, stock up on canned goods and start stuffing our mattress with gold so we are ready.
Don't get sucked into that sort of pessimism -- this market is acting extremely well. Yes, we have run a bit too hot and need a pause, but that is healthy behavior. Don't be fooled into thinking that a brief respite in this market move is the beginning of the end.
Keep in mind that even if the broader market pauses, there is very likely to be some strong action in secondary stocks. I often chalk up some of my best results when the market indices are in need of a rest, and yet the bulls are hungry for more and start looking for stocks that have not already moved up. This rally has put some hot money into play and now it's looking for places to go. If you can catch the latest object of momentum affection, you can do well even if the broader market is resting.
The news flow is slow this morning. Oil is down again and is hovering around the $60 level. Continued pressure there should help support the market. We don't have any major economic news on the agenda and there was no deal news over the weekend. Overseas markets are soft and gold is trading down again.
Gary B. Smith:
