Securities Research Services

Tuesday, May 17, 2005

Climbing a Wall of Worry

It is good to see the market climbing up off the floor and putting together some nice follow through after months and months of failing to do so. Low volume indicates that institutional money is still skeptical about this recovery however and is not yet participating in this move. This does not mean that this move is doomed to failure. Many times a recovery will start on low volume and as it progresses institutional money will come off the sidelines after pullbacks fail to develop. Keep in mind that institutional traders have a different set of goals than does the retail trader. While the retail trader is focused almost entirely on profits, institutional traders are focused on keeping up with the averages. Their greatest fear in fact is underperforming the averages and careers are built and lost based solely where their performance matches up against the S&P 500. If pullbacks fail to develop they will scramble to put their money to work fearing they are missing the boat. This is what we call “scaling the wall of worry.” We continue to look for choppy trading this week as contracts expire on Friday. The chip makers have been leading the way in this tech recovery, but now the sector is up against resistance and is likely to pull back and base a little before it attempts a breakout. INTC is a good stock to watch to determine how this sector will fair. It has resistance at $25.50 and has traded straight up for the past month. We would expect to see it retrace at least 1/3 of this move, regrouping before it makes a serious attempt at the $25.50 resistance level. This is analogous of the tech sector.

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