Monday, March 05, 2007

Is that All You've Got?

The market continues its volatile trading this morning with an initial downdraft and now a tepid rally. I suspect this pattern will continue for the remainder of the week until we get the employment report on Friday. Obviously, that report now takes on more than a little significance.

The sentiment surveys released over the weekend proved once again that the market is, above all, a reflection of the emotions of its participants. Two weeks ago, bears were scarce with only 22% identifying themselves of the ursine persuasion. Bulls topped 50% of the survey participants. After one lousy week, bears are now in the majority with 39.6% and bulls clocking in at 36.6%. The rest are just confused I guess. One of the main reasons we advised doing some selling in our February 24th tactical update was the prevalence of bulls in the surveys. Now with the bears emerging from hibernation, I am looking for a bottom of some kind to also emerge.

That doesn't mean there won't be more downside action in the market. In fact, another downdraft is probably in the cards sometime this week. What I would really like to see is a day where the market opens down hard and recovers to close higher. That pattern is quite common at bottoms and is usually a good signal that it's okay to venture back in.

What usually happens after a big down day like last Tuesday? Ticker Sense has the numbers:
When a 3% decline happens during a bull market, the S&P 500 is up an average of 2.95% one month later and 9.32% three months later. The numbers are somewhat different during a bear market, but they also show gains. Let's hope that holds true again.

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