The Herd Is Confused

It is a peculiar day and it is making trading quite difficult. On one hand, we have the Dow Jones Industrial Average that has gone into positive territory, but on the other hand you have the small-cap index still down 1.7%. Breadth is better than 2-to-1 negative, but retailers, biotechnology and pharmaceuticals are acting well.

The big weight on the market today is energy, steel and commodities. Some of the traders' favorite sectors like solar energy and bulk shipping are extremely poor today. The easy explanation for the weakness in commodities and energy is that the poor employment report last Thursday triggered the realization that maybe the economy isn't going to be so great going forward.

It is interesting how the market is suppose to be a forward-looking, discounting mechanism, yet it doesn't really react until we actual have news like the 9.5% unemployment rate. If the market really were as prescient as it was supposed to be, then news would never really have an impact.

In actuality, the day-to-day action in the market is not a discounting machine looking to the future, but traders tying to get a jump on other traders. The market has never predicted the future very well -- if it did, we wouldn't have sudden booms and busts.

The market is mainly a herd mentality, and you make money by riding the lead cow. He'll eventually go over a cliff, but if you ride him right you will make a profit. The herd will always go too far, but you have to stay with them while they are running.

Right now the herd is a bit confused. They don't like small stocks or energy and commodities, but the DJIA is holding up and giving the illusion of some strength. The herd had a pretty good run to the downside on Friday, and now a bit of a rest sets us up for another try at a downward push. The market is a lot weaker than it looks, so be careful playing any quick bounces.

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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.