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    This Dead Cat Has Some Life

    By Rev Shark
    RealMoney.com Contributor
    3/7/2007 7:18 AM EST
    Click here for more stories by Rev Shark

    "You may be deceived if you trust too much, but you will live in torment if you don't trust enough."

    -- Frank Crane

    Almost no one trusts yesterday's bounce to last and it is not hard to understand why. After the dramatic weakness last week it just isn't reasonable to expect the market to shrug it off and continue on its way as if nothing happened.

    What was particularly significant about the selloff was the level of negative volume and the number of stocks that declined. We last saw such a broad and far-reaching selloff back in 1987. The percentage point loss we suffered was nowhere near what occurred back then but clearly there was fear in the air and it seems illogical that such strong emotions would completely disappear a few days later.

    Market commentators attributed the breakdown to a variety of factors such as weakness in China, the unwinding of the yen carry trade, comments about a possible recession from Alan Greenspan, the collapse of sub-prime mortgage lenders and so on. All these things played some part in what happened but the real reason behind any market move is always going to be the mood swings of investors. After months of complacency they finally decided to focus on some negative possibilities and as is always the case with mob psychology, the emotion feed on itself and led to a move move.

    Even if none of the reasons given for the selloff prove to be true, we need to stay focused on sentiment. Investor sentiment does not need a good reason to shift. As anyone knows who has dealt with a spouse or a significant other, trying to figure out the reasons why moods have changed can be an impossible task.

    So the question of the day is whether we undergone a fundamental shift in investor sentiment that indicates that the selling is not finished or should we trust this bounce to last as investors regain their optimism about where things are headed?

    It is a very tough thing for investors to shrug off the pain of last week's meltdown. Many simply want to escape the situation and are looking for a way to do so. Those folks plus the long suffering bears who have finally enjoyed some success and want to play again are going to put the pressure on this market.

    On the other side of the equation is the high level of liquid assets held by aggressive hedge funds and investors that were frustrated these last few months as the market went straight up and never gave them an opportunity to deploy their capital. We saw them yesterday, along with some short-term traders yesterday, and they are going to be the forces that keep the bears from running wild.

    Because of the huge distrust of yesterday's bounce, the likelihood is that the market will not cooperate with the convention wisdom. We certainly have every reason to roll over again but the contrary and perverse market beast is very likely to frustrate those who believe it will be that simple.

    Eventually the market is likely to succumb to the fundamental shift in market sentiment that is taking place but in the short term be wary of the conventional thinking that this dead cat bounce is going to fail quickly and easily. It is likely to stick around longer than feels right before it eventually fails.

    Overseas markets mainly held steady and oil and gold are up slightly. Our early indications are soft but I don't think our bounce is over yet and am looking for overanxious bears who hit this open to be squeezed.

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