Markets Move Higher Amid Doubts

05/05/2009 11:00 am EST

Focus: MARKETS

Mark Leibovit

Chief Market Strategist, VRTrader.com

Mark Leibovit, chief market strategist of VRTrader.com, says stocks continue to rise in the face of bad news, but thinks the foundations of the rally look weak.

The market continued its amazing ascent off the March low Monday as the indices posted solid gains. For the session, the Dow Jones Industrial Average was up 214.33 at 8426.74, the Standard & Poor’s 500 index was up 29.72 at 907.24, and the Nasdaq Composite index was up 44.36 at 1763.56. Volume increased on both exchanges and breadth was solid.

The market continues to move forward in an environment where bad or unsettling news is simply cast aside for fear of “missing the move.” Buyers are bidding stocks higher across the board, seeming to want equities at any price as economic recovery is priced in. Now the only question seems to be how strong the recovery [will be and when it will come].

Wells Fargo (NYSE: WFC) was told by regulators that they need to raise additional capital to survive in the event of a deeper downturn in the economy. Trader response? WFC was bid up 23.66%. Also ignored were comments from Kansas City Fed president Thomas M. Hoenig, who stated that despite signs of improvement, markets remain under stress and the economic outlook is uncertain. He also stated that it will be some time before markets can be functional without government aid. No one seemed to care.

Until we see some real selling effort, the bulls will be able to take this market higher. We will see what the prevailing market forces are and trade accordingly.

When we took profits [last week] and even before, I wrote that this is simply a bear market rally. [This week], when this cyclically bullish period is over, it is likely that the market will begin declining again. The nature of that decline will tell us whether this rally is indeed just a bear market rally or the beginning of the new bull market.

But looking at recent action, I must say that this rally looks weak. This is a cyclically bullish period. Additionally, the market indexes broke out to new highs [last] Wednesday and [Thursday]. In that kind of environment, we should be seeing the stock market soar. Instead, it is struggling to hold on to gains. Definitely a sign of weakness.

If and when selling picks up in earnest, there are no natural support areas where backing and filling took place on the way up, as this move has had no meaningful correction. That means that if this market goes back down to test the March lows, we could get there in short order. Anyone holding long positions should tighten their stops here.

Also remember, “sell in May and go away” (not a perfect indicator by any means) is now upon us. Down side could easily be back to the 830s in the S&P and even possibly to the 780s.

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