Tuesday, March 6, 2007

Did That Dead Cat Bounce? Yes, Indeed!

Is this how downtrends end? With a one-day wonder resurgence that erases any doubt that the US economy, American resolve and corporate equities are safe investments, the markets have made a bold statement.

Too bad it's impossible to believe.

The Dow added 157 points, the NASDAQ was up 44.46, the S&P gained 21.29 and the NYSE Composite index grew by 168. These were solid gains all around, led by the NYSE Composite and the NASDAQ's 1.9% improvement, but one good day, after a series of bad ones, does not a bull market make. The trend is still to the downside. The Dow, for example, is still nearly 600 points below it's high of 12,795.93, achieved less then a month ago. It's broken through the 50 day moving average and today's gain - albeit impressive - leaves it more than 300 points below that mark.

Further, the big 416-point drop last Tuesday was preceded by four consecutive down sessions. Today's winner was only the 2nd positive close of the last 10 sessions. Bulls, hard-headed as they are, usually need to be hit over the head with a mallet before they stop charging ahead, so maybe more evidence is needed. Give them a couple more weeks.

The advance-decline and volume numbers for today were real shockers. This was no ordinary buying spree. Every sucker in the universe was taking the plunge, a sign that cooler heads (Bears, shorts and put options players) are about to take more of their money.

Gainers outnumbered losers by a 4-1 margin, but the volume figures were extraordinary. Dow volume checked in at only 5-6% on the combined averages. Up volume of 94% signals just one thing - this is nothing more than a dead cat bounce on a temporarily oversold condition. Everybody moving at once is never a good sign because the chances of everybody being right are slim to none.

This market will likely give today's gains back by the end of the week. If this mini-rally gets legs and moves another step forward, it may take until the end of next week to unwind, but unwind it will. The market is not in any condition to regroup and head for higher ground. This correction is still in its earliest stage. We can call today the beginning of stage two, in which those who did not lose enough to be wary in phase one will be eaten alive.

New highs reversed the recent trend, though not by much, winning the day by a slim margin of 123-108. That's encouraging for the Bulls, but nothing to write home about.

Oil, gold and silver were up marginally. Commodities are still stuck in somewhat overbought ranges and cannot move higher when the global economy is in a cooling period or slowing down, which it is. For bulls of all persuasions, however, today was needed relief. But, like all relief rallies, they are usually dramatic and short-lived. This was no exception.

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