RealMoney Silver - Everyone Hates to Miss a Party

Everyone Hates to Miss a Party
By Rev Shark
RealMoney.com Contributor
5/16/2008 8:56 AM EDT

Nothing makes you more tolerant of a neighbor's noisy party than being there.
-- Franklin P. Jones

The "worst is over" rally has been picking up steam as bears, skeptics and underinvested bulls become increasingly fearful that the worst really is over. They are rushing to find long exposure just in case the market continues to go straight back up.

One of the most powerful forces in investing is "performance anxiety," which is nothing more than feeling like you weren't invited to a good party. Investors become so anxious when the market runs away from them that many are willing to set aside their discipline and take increased short-term risks. This drives the market up even further, causing more performance anxiety and bringing in more buyers. This is why markets often have a tendency to move higher than seems reasonable.

Because of the seemingly irrational momentum that can persist for some time, it is extremely important that investors not fight the trend. When you try to impose logical reasons for why an emotional market will change course, you almost never going to get the timing right.

The difficulty of recent market strength is greatly complicated by the nature of the market leadership. All year long, the strong groups in the market have been those that have benefit from a weak dollar and worldwide demand. Oil, steel, agriculture, solar energy, metals, mining and commodities have been making parabolic moves.

Recently, as crude oil prices have generally gone straight up, the market has been spiking every time it dips but has been ignoring it when it goes up. Oil is complicated because the oil stocks and the sectors that move with them are a big sector of the market. Hence, higher oil will drive up the indices to some degree. On the other hand, sectors like retail benefit from lower oil and offset the pullbacks in that sector, as we saw yesterday.

What was particularly interesting about yesterday's move was that it was mostly driven by new names. Technology stocks like Intel (INTC) and Cisco (CSCO) were the big drivers yesterday for the first time in a long while. More recent leaders like Research In Motion (RIMM) , Google (GOOG) and Baidu (BIDU) did little. You missed out on most of the move yesterday if you had stuck with stocks that have been the best recent performers.

The question now is whether a market rally from this point will be driven by new leaders. Goldman Sachs is out this morning predicting that crude oil will average $141 in the second half of the year. If that is the case, we are very likely to see the sectors that have led so far this year continue to lead. Will that kill a rally in retail and technology? Or is the economy now so healthy that the rally will broaden out even further and carry everything higher?

That certainly is questionable, but for now the market has the momentum and market players are very optimistic. I continue to feel we are going to run into some problems soon, especially because sentiment is now at the point where I have seen a sudden spike in abusive bulls.

We have a slightly positive start on the way even as crude oil prices spike up once again.

James "Rev Shark" DePorre is the author of Invest Like a Shark: How a Deaf Guy with No Job and Limited Capital made a Fortune Investing in the Stock Market. He is founder and CEO of Shark Asset Management, an investment management firm, and he also operates sharkinvesting.com, an interactive online community that serves and educates active investors. DePorre holds business and law degrees from the University of Michigan, is a member of the Michigan Bar Association and a former tax attorney and CPA. He lives in Anna Maria Island, Fla., with his wife and two children. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Rev Shark appreciates your feedback; click here.

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