Time Will Tell

From everything I've read, the single most important factor to making money in the stock market is the ability interpret the market's direction. This also might be the most challenging task.

I began investing about a month before Bear Stearns announced the collapse of two hedge funds associated with the burst of the housing bubble. This marked the beginning of the end of a nice bull market which began in 2003, I believe. Therefore, I haven't enjoyed any 'easy' time in the market. It's been difficult to fail, the number of failed rallies has been above average, and the uptrends have not produced broad based gains, for the most part. It's been a difficult environment for the seasoned trader, and much more so for myself.

It's probably better for me this way. If I'd been widely successful from the get go, I probably would've developed a huge ego and lost everything within a couple of years. Better for me to learn the hard lessons out of the gate and get put in my place. I know how dangerous the market can be, so I take my gains with a dose of humility and I'm always waiting for the other shoe to fall.

IBD offers a useful column each day called the 'Big Picture' which recounts the day's action and states their current outlook on the market. This is an excellent learning tool and because they post the distribution day count during a rally it's a great resource. I haven't always agreed with their market outlook, though - and I still think it's up to me to determine the stated of the market. It's my money on the line, after all.

As I stated on May 21st, I did not agree with IBD's call that the market had entered a correction.

The case that we did enter a correction was fairly strong. Distribution days had mounted up to six on the S&P 500 and NYSE composite. The market suffered two such distribution days in quick succession, causing the DJIA to pierce it's 50 dma. The rally's leadership had been in question - it was fairly narrowly limited to energy and commodity plays. These stocks seemed to be showing signs have weekness.

In spite of all that, I do not think the market entered a correction. For one thing, the Nasdaq index, which had been leading the rally, was well above it's 50 dma and only had two distribution days. The S&P 500 also remained above it's 50 dma, and was due to drop off three distribution days in the next week (which it did). Many leaders were pulling back, it was true, but few of them were even near their 50 dma. Yes, the leadership was narrow, but it was strong.

Here we are a week and a half later, and not too much has changed. The market did continue to fall, but on weaker volume. The Nasdaq and S&P 500 found support at the 50 dma and rebounded on progressively higher volume. The Nasdaq moved up enough to actually close above it's 200 dma yesterday, it's second attempt to clear this key technical resistance level.

What followed today looks pretty bad on the surface. The market suffered a deep, broad based selloff. Of key interest though is the fact that volume was lower today across the board, indicating big money was not rushing for the exits. Leading stocks that I follow sold off, but not on high volume. This looks to me like an orderly pullback.

I'm not trying to convince myself that we're in a roaring bull market. I'm not even looking to purchase a third stock. However, I remain comfortable in my decision to hold both (SOL) and (SOHU), which have acted well the past couple weeks. If I see the S&P 500 and or the Nasdaq close below their 50 dma I will have to rethink my position, but for now this market has refused to roll over.

-Geoff