Beware of Bull and False Hopes

retail sales crashWell, we saw another volatile day of trading, seeing the market back in forth from red to green. Trading in these conditions can be very frustrating for those that are hoping for a single direction in the market, as there have been several violent trading swings at different parts of the day recently. Just when I thought the market was going to rally, it was shot down and just as I thought a sell off was imminent, the bulls jumped back in. Beware of day-trading in this market, as it could cause a heart attack. Volume still continues to remain low, which is one big reason I have not chosen to take a bigger position in the market at this point. I assume this is the case as a result to the uncertainty that remains with the bank stress test results. There are also some other things to be aware of when considering trading at this point.

Tomorrow Q1 GDP is reported which is sure to cause some discussion for tomorrow. However, even with a bad number, as we saw with unemployment data, bull's defense will be that much of this data is "backward looking" data and that we would expect these numbers to be bad. However, more problems still exist in the retail sector as well as an increasing unemployment problem. That coupled with the lack of consumer spending which I discussed in Sunday's post, should continue to show disappointing numbers in GDP for the future. At any rate, I would think that tomorrow's number should be a reinforcement for people that we continue to remain in a recession/depression and that it will take more than a few bank accounting changes and trillions of dollars of government spending to turn this ship around.

crash market stocks podcastOptimism hit the markets today when we received a very large gain in the consumer sentiment report. As encouraging as this can be it is important to remember that this information is merely based on a survey of a small amount of US consumers. It is no surprise to me that in a midst of a very strong bull rally, there is a boost in sentiment. In this fragile state, people's emotions are on eggshells. This is why such an environment is conducive for a crash. Just as emotion is able to change with the flip of a switch, so are investor's trading habits. It doesn't take very much selling to cause for worries to return to the markets. In fact, I am surprised to see the change we've seen for just the two days of slight selling we've seen from yesterday and today. Although subtle, we still find ourselves in the midst of negative fundamental data that can easily support the notion of another leg down. So, I do not see it hard to believe at all that another sell off is in our near future. Just remember, we reached this same number for consumer sentiment back in November. We saw what that resulted in.

I also do understand the risk of jumping in too early on the short side. We have learned from the past couple of months that outside intervention can cause for big reactions from the markets. I am very hesitant to jump in stronger on the short side until these bank stress test results are announced. I believe the government is doing a very good job of managing everyone's expectations that these are rigorous tests that should show bank's ability to stay solvent in worsening times. However, as I have discussed before, many of the assumptions they are using are already numbers that we either are already experiencing or will be very shortly. So how can this be a "test" if we are already there? I think many of the banks will pass with flying colors, which should once again cause for this false reason to cheer for banks that indeed their worst times have come and gone. Don't expect me to jump on that train and don't forget the commercial real estate!

It can be easy to buy into this optimism of the beginning of the bull market. Even if by some miraculous event we did see the bottom of this market back in March, history has shown us that even in the beginning of a bull market, it is common for the market to return and retest previous lows. We saw this in our most recent bear market in 2002. This is not to say I believe that this is the beginning of the bull. I am saying that I am having a hard time finding any good reason to go long at this point. I believe this is becoming more accepted in the markets, as we continue to see selling. Even in the midst of a "good news day" like we saw today, bears prevailed with another selling day. I think that's a big one to tack up for the bears.

So we'll see how we go into the rest of the week. Bears are having a very hard time of keeping this market down and I assume, without any economic help, they will continue to have a hard time. Many are still waiting for that spark. Financials are still drawing concerns with investor's wonders if there will be a need for more capital for Citi and Bank of America. Of course they'll need more capital, but the government is being very careful about how they go about getting them that capital. Tomorrow should be a telling day. If you're looking to get into trading and you're looking for a trading platform, check out TradeKing, as they have good rates right now. Happy Trading.


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