Was Friday the Top?

If you're prone to watching the financial news networks - warning, doing so may be harmful to your portfolio - Tuesday must have been like living in a giant echo chamber. Everyone on the air was screaming "sell, sell, sell," neatly flowing into the dwnward trend of the market, for the second straight day.

Anyone who pays attention to the talking heads on CNBC or elsewhere probably noticed that the mood had shifted dramatically from the effusive optimism on Friday to the terrified pessimism on Tuesday. The reasons for the sudden change of heart are manifold and diverse, but the overriding themes were that markets had run too far, too fast, and that the banking sector was being mercilessly pounded.

The crazies on TV are probably not so much in tune with the inner workings of the market as say, your average cat or dog. The downturns over the past week have been generally mild, and today's was nothing really different. Investors were taking profits at the end of a particularly solid earnings season came and went. There's nothing obscene or mysterious about taking some money off the table. In fact, it's rather prudent, sound and eventually productive for the markets. Any money coming out of stocks today will likely go back in within weeks. Traders, being driven alternately by fear and greed, won't sit idle for long, especially if stocks rebound quickly, though a prolonged period of sideways movement cannot be ruled out altogether. By the start of football season, in about 3 weeks, stocks won't be much changed from current levels.

Another consideration is that the financials, which have largely led the most recent one-month rally, are more than a little overbought. Remember, it was less than a year ago that the largest banking institutions in the world were about to implode from various malinvestments and poor money management. Faith in these same companies is fickle and thinly-based. A cyclical movement away from financial stocks and into more fundamental companies like industrials, key services or raw materials makes more sense than an abrupt end to the rally.

Dow 9,241.45, -96.50 (1.03%)
Nasdaq 1,969.73, -22.51 (1.13%)
S&P 500 994.35, -12.75 (1.27%)
NYSE Composite 6,463.62, -86.43 (1.32%)

On top of the aforementioned rationales for the rally not really being over, the lack of volume on Tuesday was really the most telling signal that not everyone was on the CNBC selling bandwagon. To say that the pace of trading was slow would be putting it lightly. Stocks were absolutely crawling off the ticker. There was no sign of the usual rush for the exits that would normally accompany a major sell-off. Losers beat gainers, by a substantial margin, 4682-1745. New highs maintained their edge over new lows, 108-47. The gap between the new highs and lows has narrowed, but nothing, not even our most consistent indicator of market strength or the lack thereof, moves in straight lines.

NYSE Volume 1,325,736,000
Nasdaq Volume 1,975,425,000

Crude oil futures finally cracked down below $70/barrel, losing $1.15 on the day, to $69.45. Gold gained 70 cents, to $947.60, while silver lost a penny to $14.35. Oil prices are likely to be further influenced by Wednesday's weekly inventory report. They continue to defy logic, gravity and natural supply-demand constraints. Oil should be selling for about $45/barrel because there's an absolute oversupply, slack demand and no natural disasters disruptive of supply.

One final caveat on the trading of Tuesday. Some of this can surely be attributed to fear of the Fed, which concludes a two-day meeting Wednesday with the release of their rate statement, which undoubtedly will be unchanged at 0-.25%. The kicker is whether the statement will be rife with discouraging commentary or filled with more hopeful - and helpful - statements. It's likely to be a little bit of both, after which the markets can get back to evaluating stocks instead of musing over macroeconomics.