Market is Now Pulling Back
After having sprinted higher in a rather impressive fashion over the past eight days, there is little doubt that the market had become extended from a short-term perspective. And with lots of good news available to traders yesterday morning, it might have been easy to expect to see stocks power higher once again. But then again, the fact that the bears decided to use the news of Osama bin Laden’s death to try and get something going for their team wasn’t exactly a surprise either.
If the concept of a market becoming overbought or extended is foreign to you, pull up a chart of SLV – iShares Silver Trust. The bottom line is this: Trees (regardless of their color or perceived value) don’t grow to the sky. And when the chart of a particular security “goes parabolic,” (again, see SLV) the trend tends to end in rather spectacular fashion.
This is not to say that a pullback, regardless of its severity, means that the run in the market in question is over. No, I’m simply trying to say that when a market – any market – becomes extended, a pullback shouldn’t be viewed as a big surprise. Or in the case of the current stock market, a pause in the joyride to the upside shouldn’t shock anyone – or be an immediate cause for alarm.
Of course, those seeing the glass as half empty were quick to point out that yesterday’s reversal is likely an omen for the future. While a pessimistic prognostication from the bear camp isn’t terribly surprising, I will take exception to the idea that Monday’s action should be viewed as a “key reversal,” which, according to my copy of “Technical Analysis for Dummies” is indeed a harbinger of bad things to come.
Although stocks did reverse lower and the move may have bolstered the bears’ confidence in the short term, yesterday’s action simply didn’t display the characteristics of a “key” reversal in which stocks tend to move explosively in one direction and then reverse hard. And while it wasn’t surprising to hear the bears pull this term out of their bag of tricks yesterday (our furry friends might be getting a little panicky right about now), I’m not sure it is applicable here.
Speaking of surprises, I heard a lot of people say that they were surprised that stocks didn’t rally on “good news” yesterday. However, the key point to take away here is that Osama bin Laden hasn’t been a “market mover” in a VERY long time. So, while the removal of America’s #1 Most Wanted, was clearly a positive from a national standpoint, I’m not sure how terribly important the event is to the stock market game right now.
In case my overuse of the phrase “not surprising” hasn’t made my point abundantly clear, I’m of the mind that yesterday’s pullback, which looks like it will continue this morning, shouldn’t be something that requires a lot of analysis/attention. In short, stocks became overbought (and, in turn, the dollar became VERY oversold) and the market is now pulling back in what appears to be a rather unspectacular fashion. Is this surprising action? Uh, no.
Turning to this morning… While China didn’t raise interest rates overnight, India did. In addition, the latest batch of earnings reports are less than inspiring. And with the dollar rising so far, it looks like the bears have retained possession in the early going.
On the Economic front… We don’t have any economic data to review before the bell this morning, but we will get a report on Factory Orders at 10:00 am eastern.
David D. Moenning
Editor: The Daily Decision
