Rev Shark:
Will Good News Scare Traders?
9/9/2005 9:01 AM EDT
"The poker player learns that sometimes both science and common sense are wrong; that the bumblebee can fly; that, perhaps, one should never trust an expert; that there are more things in heaven and earth than are dreamt of by those with an academic bent."
-- David Mamet
The market has done an excellent job of making uncomfortable those traders who rely on common sense and logic. Despite a long list of negatives, the market continues to act well. If economic fallout from the hurricane, high oil prices, inflationary and interest rate pressures, a mediocre economy and seasonality can't drive this market down, what will?
Given the perverse nature of the market, the likelihood is that we will see weakness when we start seeing good news. That sounds like a rather flippant observation but it is consistent with the psychology of the market. Market participants bought bad news events like Hurricane Katrina and the bombings in London in part because they felt that the market had adequately compensated for the fallout. Many traders saw an opportunity to take advantage of a selloff and as they rushed in, others became afraid they would be left out and also jumped in.
Given this thinking there is a high likelihood that good news will cause this process to work in reverse. Traders will look to take profits into strength and when the market stalls and doesn't follow through, other folks will follow along and start locking in profits.
The market would be a whole lot easer if bad news meant the market downtrended and good news always resulted in an uptrend, but if it was that simple we'd all be sitting on our yachts in the Mediterranean sipping a glass of Merlot.
This morning we have good news from Texas Instruments (TXN:NYSE) and OK news from Intel (INTC:Nasdaq), and we are seeing a little early strength. Is this the sort of good news that will induce traders to take profits? We had a few cracks in the market yesterday, as breadth lagged and only the semiconductors showed much life. If the market doesn't gain traction on the semiconductor news, will profit-taking pick up?
I'm leaning that way but continue to be more neutral than bearish about the market. Until there is clear technical damage -- most notably a breach of the uptrend since the hurricane hit -- the bulls have the advantage.
The chip news is helping us out here in the early going but oil is also up. Once again I'll be watching breadth very closely to see if the indices are reflective of the broader market. Overseas markets were perky overnight but the dollar is weak. It should be another tricky day of trading.
Gary B. Smith:
