Watch Out for Sucker Rallies

01/28/2009 1:00 pm EST

Focus: MARKETS

Mark Leibovit

Chief Market Strategist, VRTrader.com

Mark Leibovit, editor of VRTrader.com, warns that any market rally is likely to be brief and limited in scope.

I was hoping and praying for the “Obama Rally,” which unfortunately ended a bit early on January 5th at 943.85 in the Standard & Poor’s 500 index to provide us with another short-sale opportunity that would carry us to new market lows. Well, so far, we sold off sharply but didn't quite reach the November 21st lows, with the notable exception of the key Dow Jones Transportation Average, which traded within 39 points of that low (2917 vs. 2878).

Yes, I am sure a rally will come, but from where? When things appear their gloomiest, the deviant market has a way of doing what would be least expected, i.e., rally.

But don't you sense too many optimists out there anticipating such a rally? Are they substituting their hopes and dreams for the naked truth of what is happening around them? And even some of the optimists on radio and on the Internet that I monitor are doing nothing more than calling for a rally back to the upper end of the recent trading range—9500 in the Dow Jones Industrial Average and 950 in the S&P 500.

This market has a long way to go before it is out of the woods. Until a clear-cut leadership group emerges, preferably the financials or technology, I expect this market to have trouble gaining any meaningful upside traction.

The afternoon rally last Thursday was sparked by comments from the White House that it will move as quickly as possible on the economic stimulus package. We have had countless government "rescues," and none of them have done the job. We have no reason to believe that this one will fix our economy. Yes, someday the economy will turn around. And yes, the government will take credit saying rescue plan X did the job, hoping you'll ignore all the previous plans that failed and the trillions that were spent doing so.

Gold could be on the verge of sudden surge higher or just as likely another sharp correction. Why? We're flirting with both the 200-day moving average and a down trend line at the $890 level. These need to be dramatically penetrated on volume to get this market moving again to the upside.

The volatility we are witnessing [in stocks] is simply keeping potential players on the sidelines. Day traders are having a field day with this type of market, but anyone who tries to position trade using prudent stops is getting taken out in a matter of hours.

Do not fall in love with the upside. We are still very much in a bear market.

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