Wednesday, April 19, 2006
Yesterday the stars aligned for the bulls. On Monday bears, for whatever masochistic reason, tried to sell the market early and bet on a breakdown. As we outlined in yesterday's report, a selling opportunity is coming, but it will be the rallies that create selling opportunities, not breakdowns. Betting on breakdowns near market tops is a fool's game. Monday's sell day merely took market indices back near support levels and the OEX crowd, one of the best contrarian groups, became overly bearish, buying two put options for every call option. Tuesday, bulls recognizing a free gift when it is handed to them, bought the market open and strength endured right up to the FOMC (Fed) meeting minutes release. Bears likely thought they had the opportunity to sell the news but bulls were handed another gift; the Fed made their strongest statement yet that interest rate hikes are nearly finished. The key phrase issued yesterday makes it clear that rate hikes are about to become history (at least for the time being: "Most members thought that the end of the tightening process was likely to be near, and some expressed concerns about the dangers of tightening too much, given the lags in the effects of policy." Today bulls face another challenge; can they manage a follow through? If recent patterns are repeated then the answer is only a qualified "maybe." Yesterday may or may not have finally convinced bears that an uptrend is still in tact. If they are convinced, they will cover their shorts and contribute to the rally by becoming buyers. Bulls also have to contend with continued oil prices, which could be heading toward the unthinkable $80-$90 range (remember when $70 was still unthinkable?). The main thing to do here is just play what is in front of us and be ready to react when the situation changes. Right now bulls have some momentum starting, we are getting some good set ups and stocks are still ignoring high oil prices. Over think this situation too much and you might miss out on some nice gains.