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23.05.2005 16:08

Rev Shark:

"I want more, and I know I shouldn't."

--Anakin Skywalker, Revenge of the Sith

Following the best week for the market so far this year the bulls are hungry for more. They have managed a very sharp turn in the market that has already gone further than many thought possible. Is it reasonable to expect that this upside move can continue?

Let's consider the positives. The most obvious is that bulls have momentum. There are a lot of folks out there who enjoy trying to call market turns but the simple fact is that the market has a tendency to trend higher (or lower) than most people feel is reasonable. My advice when we were in a downtrend was not to be too quite to anticipate that it will end. Now that we are in an uptrend my advice is the same. Don't be overly anticipatory. Until there is some firm evidence to the contrary, don't assume that the current trend will not persist.

Other recent market positives are the series of strong closes. In good markets buyers tend to step up at the close, and the Nasdaq has closed at or near its highs the last five days in a row. Leadership from technology and the struggles of oils and cyclicals is also a plus. Money is shifting and we are seeing signs of emerging leadership from groups that are better for the market.

Despite the positives any reasonable person who looks at the charts of the major indices knows that they shouldn't expect this up move to continue uninterrupted. The indices are extended, there is formidable overhead resistance and we need to consolidate gains. However, the very fact that so many people want, need and expect the market to pull back makes it less likely to do so. That is especially so since most sentiment measures remain quite negative and many market participants are not well positioned.

We saw a particularly good example on Friday of how an extended market can become more extended. That phenomenon is even more likely to occur when there is a large supply of poorly positioned market participants. When there are a lot of underinvested bulls and anxious shorts, dips in the market don't last long. They are pounced on quickly and then as the market reverses and moves up the folks on the sidelines who missed the buying opportunity panic and start chasing the market higher.

The best thing that could happen for the bulls right now is for the market to rest and consolidate a bit. A pullback would shake out the short termers and weak holders and allow the bears to regain some of their confidence. The chances of this market rolling over and going straight down at this juncture are quite low unless there is some surprising news. A lot of folks missed out on this move and they are going to be looking for a chance to do some buying on weakness.

It should be an interesting week. We have positive action out of the gate, which is always suspect on Monday mornings. The key to measuring the market's strength will be watching the action on a pullback after the open.

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