Is Market Trying To Trick Us?

Five consecutive up days on good volume. This is what the last week brought us in the stock market. Indices successfully tested sell-off from the beginning of August, established ascending trend line and now Nasdaq is the first on breaking above resistance. Also, market momentum has drastically improved past three weeks as we had only one major distribution day on September 9. I guess this week confirmed that selling before 911 anniversary was mostly due some fear of attacks. Also, my watch list of stocks that are or could get into buyable zone has also extended to seven stocks. All in all, the picture seems to be improving.


Now if anyone is questioning then why don't I issue a buy signal for the stock market if everything is so great, my answer is because I've seen this before. This market has been topping for five months after a two year bull market. 20% corrections don't recover that easily. A sell-off of that magnitude indicates that institutional investors are leaving the market. There was still no major accumulation at the bottom after the sell-off and many leaders of the past bull are broken down or at least look very very toppy (AAPL, NFLX, BIDU, CMG and FOSL just to name a few). This rally is fueled by broken leaders rallying from severely oversold conditions and low-priced, low quality stocks taking the lead.

My studies of the past market behavior indicate that this rally doesn't have much more to go. It is already 10% off the lows and if my predictions are correct we should now see a slow grind higher for maybe another week or two before new distribution days start to pile in. Maybe we even get a sort of consolidation pattern, maybe even a breakout, but the fact is that market cannot rally substantially higher without real leadership behind. And $10, 200k volume stocks cannot be leaders. What we need is major accumulation by instituonal players in high quality, big capitalization stocks. Such accumulation would be cleary seen on all indices as high volume close to the bottom, followed by many breakouts in high quality stocks. No such thing for now. I think we may be in for a very boring fall as the second phase of bear market develops a fake rally before another drop. If I see any short-term further potential in this supposed-bear-market-rally, I may buy a stock or two. But I'm not giving an outright buy signal until I'm absolutely positive that this bear market is over.