Thursday, August 24, 2006
Sentiment has swung wildly back to overly bearish after yesterday's down day. Tech led the way lower but the semiconductor sector showed some resiliency, as did the S&P 500. Our scans today show a lot of bearish set ups and few reliable bull set ups. Nevertheless, we would expect to see the market bounce some today just due to the fact that bears are pushing too hard here. The reason that an overabundance of bearishness can cause the market to rally is not that complicated if you think about it. When the crowd is leaning one way, it means that they have committed their money. If the market fails to go lower due to the fact that all money that can be committed is already committed, bulls can gain confidence and cause short positions to start feeling pain. Once shorts start to get stopped out, their covering causes the market to move even higher. It's not really a question whether the market will deny shorts their sell off event this week. Shorts are likely to be disappointed if that is their hope. The real question is, is this market going to continue to experience serious distribution that quickly shuts down the rallies? If the 4-year cycle is going to take hold when the professionals return after Labor Day, then we should see more distribution and should see stocks struggle as indices near last week's highs.