Börsipäev 1. november

01.11.2005 16:18

Rev Shark:

Ability to Deal With Bad News Is Key
11/1/2005 8:37 AM EST

Wherever there is danger, there lurks opportunity; whenever there is opportunity, there lurks danger. The two are inseparable. They go together.

--Earl Nightingale

After a powerful two-day rally, the danger of a pullback is increasing, but so is the potential opportunity of a strong uptrend. The key to the market lately has been its ability to disregard negative news and a generally gloomy sentiment. This rally began Friday morning after poor news from Microsoft (MSFT:Nasdaq) and the chip sector. It picked up steam yesterday on some slightly positive economic news and a lot of badly positioned market participants.

The question now is whether a warning from Dell (DELL:Nasdaq) and another rate hike from the FOMC boys is going to cool this market. The reaction today is going to tell us a lot about the state of the market. If the market can handle these dangers, the upside possibilities are very bright.

As you might expect, Dell has a couple of downgrades this morning and is putting some pressure on the futures. Is this a major surprise that will stun the bulls? Not if you look at the charts. The stock is off around 25% in the last few months and has been downtrending since late last year. Like Microsoft, it is a dominant elephantine company that simply can't grow like it has in the past. Its problems have been anticipated by the market, to an extent, and now we will see to what degree they have been priced in. If the market is able to keep its reaction to Dell mild, the bulls will be in good shape.

The second potential danger the market faces is the FOMC interest rate decision that is due at 2:15 p.m. EST. Once again, a quarter-point hike is widely anticipated and the accompanying policy statement is likely to be the key. There is a contingent of folks that are hopeful that the Fed may be a bit less hawkish, but it is questionable how widely held that sentiment might be. Although there is hope that the new Fed chief may take a different approach, Dr. Greenspan is still in control and it is doubtful he will call into question his legacy as an inflation fighter.

Even if the news flow doesn't hurt the bulls, they do face some technical hurdles. After a good bounce, we are slightly overbought and could use a rest. A contained pullback here would not be a major concern, and would even be downright healthy as long as we don't slip too much. The problem with recent pullbacks is that they have been too strong, with very poor breadth and high volume. A less mild pullback on the Dell news would be very promising.

It does feel to me that there still is a fairly high level of skepticism about this market and that many folks are underinvested. Although many of the writers on RealMoney are bullish, I've heard from and have seen a lot of very confident bearish arguments. The potential for climbing a wall of worry are quite high -- and don't forget we are now entering the seasonally strongest three-month period of the year.

We have our work cut out for us today. Be prepared for some choppy action as market players wrestle with which way this market is headed. The ability to deal with bad news is the key.

In the early going, we have negative indications. Overseas markets were up slightly, oil is flat and gold has bounced a bit. Dell doesn't seem to be having too much impact overseas so far.

Position: No positions in stocks mentioned.

Gary B. Smith:

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