A Pivotal Juncture

Who shall forbid a wise skepticism, seeing that there is no practical question on which anything more than an approximate solution can be had?
-- Ralph Waldo Emerson

The bullish case for this market is quite simple. The worst of the bad debt issue is over, the economy will suffer only a minor recession at worst, the housing market is at a bottom and inflation is mild and under control.

That sounds pretty darn promising, and if that is indeed the case, we should be watching for this market to march steadily higher in the months ahead.

The skeptical bears say that this is typical bullish hopefulness that you expect to see during bear-market bounces. The optimists are very quick to embrace the view that all our problems and woes have now been acknowledged, embraced and discounted. The bears argue that market players are way too sanguine about our economic state and that sooner or later the reality will become clear and we will suffer another downleg.

Unfortunately for the bears, they are overanticipating market weakness and have ended up causing some upside spikes when they are surprised by unexpected positive news. Yesterday was a particularly good example when the better-than-expected inflation numbers hit. The bears argue that the government numbers are an outright fiction, but the strong market reaction sent them scrambling to cover shorts and look for long-side exposure. Late in the day, the market apparently came to realize that maybe the bears have a point, but that didn't prevent a bit of a market frenzy before a late-day selloff.

That leaves the market at an interesting juncture. Technically we have now been turned back twice at key overhead resistance in the S&P 500 at 1420. The 200-day simple moving average of 1428 also lurks above. The 1420 area is an extremely obvious technical level, and everyone is going to be keyed on that area. A move above would likely trigger some buy stops and give us at least a short-lived spike.

On the other hand, the nasty reversal yesterday is indicative of a "blow-off" move where overoptimistic buyers expend their emotion and buying power and now don't have the juice to do it again without at least a little rest.

While I haven't been shorting this market lately, I've been wrongfully skeptical of the bulls' ability to keep this bounce going. I continue to be quite wary of how much longer we can run off the March lows without at least a rest, but the bulls have been quite impressive so far, notwithstanding yesterday's reversal. We have to respect the bulls at this point and not be too quick to count them out.

What is making this market even more tricky lately is the very high level of volatility in oil and commodities as the dollar moves around. The swings in some of the groups that have led for most of the year are quite severe and making trading very tricky. Even if the broad indices act well, that doesn't mean that the key leading sectors to date are going to continue to lead.

So I'm keeping an open mind and looking for some developing themes to exploit. This morning we have very mixed action as market players try to sort out what the sharp reversal yesterday indicated.

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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.