Hope Springs Eternal

Holy mackerel! Did everyone go short the market while I was on vacation?

I suppose I shouldn't say that as it is far too convenient for me to blame this rally only on short-covering. The truth is that you don't usually get that kind of explosive move unless the boat was tilted too heavily to one side AND quite a few people are itching to get long again at the same time.

Although I'm still in "catch-up" mode (i.e. consider that when evaluating my comments here), it seems like the mood has certainly improved among the herd. I see that not only in the news feeds I monitor, but also in my email. The action of the tape itself also offers an important clue.

As someone who has been focused on defense and capital preservation, I have to admit the Fed sure isn't making it easy to stay that way. With money market rates well under the rate of inflation and now the market is trying to tear down my safety cash position in the TIP (see below), I must not be the only idiot out there who sees few options but to buy stocks again. After all, that's the Fed's master plan all along, correct?

With the 1350 level now cleared, we need sustained confirmation above 1400 (and later 1450). And, yes, I'm being redundant in order to emphasize the importance of these levels. Unfortunately, today's love affair also triggered an extreme overbought reading in the old T2108 that I monitor:

If you're one of those who think we're going to see at least a major counter-trend rally (if not more), we should see the overbought conditions become even more overbought as investors scramble to get on the rally train. The last major rally we saw from August to the market highs in October saw that same thing (do you see the series of overbought readings in the chart above during that same time frame?) Likewise, if this is just another bear market rally, we'll roll over and do so in a dramatic way again like we've done consistently since last fall.

On another note, it was also quite interesting to note which ETFs led the market today. Some of the biggest upside movers were the ProShares Ultra QQQ ETF (QLD), iShares Dow Jones US Broker-Dealers Index Fund ETF (IAI), SPDR S&P Homebuilders ETF (XHB), iShares FTSE/Xinhua China 25 Index Fund ETF (FXI), and KBW Bank ETF (KBE) while commodities were taken down. Before I left, I remember saying that one of the things the bulls were looking for was rotation back to tech and we saw that big time. Whether those moves will be sustained however will have a lot to do with earnings will see from this group later in the month but that's tomorrow's problem not today.

Ultimately, the lesson that we've all learned by now is that this market has more than a few tricks up its sleeve and it will continue to keep us on our toes but at the same time we have all of the weapons we need to know where the wind is blowing and how to react in turn. Let's keep monitoring all of these factors and let the market itself show us the way.