Tuesday, March 17, 2009

Pre-Market Thoughts

Although they’re off their best levels from earlier this morning, the index futures are pointing to a higher start after having regained some ground on the heels of a much better than expected reading on housing starts, which came in at +583K (versus estimates of +450K), and building permits, which came in at +547K (versus estimates of +500K). The data also showed an upward revision to last months numbers, with housing starts rising to 477K from 466K and building permits from 531K from 521K. Possible signs of improvement in the housing market, coupled with recent positive news flow from the financials and expectations for some actual details regarding the Administration’s plans for dealing with the bad debt still on the balance sheets of financial institutions gives the bulls some more ammunition, but does that mean we can start celebrating the end of this bear market?

Given the constant cheerleading in the media, many casual market observers are under the impression that the best thing for the market is if prices go straight up. However, the truth of the matter is that it’s the pullbacks and dips that are the necessary ingredients for a healthier market, especially when they come as the market tries to begin the process of repairing the sort of technical damage we saw in the Feb-Mar slow-motion crash. The reason, of course, is that they provide opportunities for some real accumulation by the big money once short-term traders who were lucky enough to catch a rally start to book their profits.

Yesterday, many so-called market experts were starting to get downright giddy as the major indices entered the afternoon sporting solid gains, but the sellers took control of the action in the final two hours, starting what will hopefully turn into a healthy pause which allows that sort of strong accumulation. If there’s real underlying support, then the market will pass a critical early stage test, after which we should really start to see some better entry points.

While the sort of rally we saw last week makes for some decent quick trading, it certainly doesn’t mean that we’ve reached a point where we can start building more substantial positions. This market and the economy are both far from being out of the woods and there’s gads of overhead resistance in the vast majority of the stocks out there. If we are indeed in the early stages of a meaningful turn, then the buyers will show up and help to start building the sort of foundation from which this market can start repairing that technical damage.

The bottom line, then, is that, while I hope that better times are ahead, there simply is not enough proof that this market deserves our trust just yet.

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