Bulls' Tenacity Is the Big Question Mark

Let me tell you the secret that has led me to my goal: my strength lies solely in my tenacity.
-- Louis Pasteur

The most impressive thing about this market since the March low has been its tenacity. Through March and April we barely managed two down days in a row before the market popped right back up again.

Strength continued in the first few days of May and even spread to many small-capitalization and low-priced stocks. Many of these secondary names made big, multiple-day moves as traders were happily chasing anything that showed up on the radar screens.

Over the last few weeks, though, things have become choppier, and while momentum is still strong in some select stocks, it is narrower and harder to trust. The market continues to come back quickly from dips -- like we saw on Tuesday -- but the bounces are fizzling out faster now than in March and April.

The obvious conclusion is that the rally has grown a bit old and we are now taking a rest. Market players have a great inclination to protect gains, which is why our bounces aren't running as much, but dip-buyers are still trying to find the momentum plays, which is keeping bids under the market.

The million-dollar question is whether the market will simply consolidate for a bit before it gains the strength and traction needed for another leg higher or whether we're reaching the peak and starting to roll back over.

In many respects the move off the low is a classic bear-market bounce. It was driven primarily by news of governmental intervention and proclamations that things were becoming worse at a slower rate. We've seen all sorts of bottom calls and a lot of hope that we avoided economic Armageddon, but you have to wonder if there has been two much optimism about how the government is deftly protecting us from all those evils that were lurking.

One of the big worries with the massive government spending is that it is going to eventually drive up interest rates. If you keep adding new supplies of bonds while demand stays steady, rates will have to go up. We had a taste of that yesterday -- that's what spooked the market.

I don't want to be too negative here, because the major indices are still in trading ranges and have not broken down yet. It has been a mistake to count out the bulls, who have done a nice job numerous times in the last couple of months of coming back from the brink of a breakdown.

But the government has made most of its big moves now, and the market is going to be looking for the positive results to start occurring. Announcing plans is the easy part. It is the implementation and their effectiveness that's hard, and that's the phase we are staring to enter here.

We had such terrible worries back in March and there was a big wave of relief that maybe they aren't that bad, but now things like higher oil and gas and rising interest rates are causing concern. With the market in a vulnerable position technically, we have to increase our vigilance just in case the tenacity of the bulls is waning.

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Know what you own: Volume leaders from Wednesday's trading include Eldorado Gold (EGO - commentary - Trade Now), Chimera (CIM - commentary - Trade Now), SPDR Trust (SPY - commentary - Trade Now), Aberdeen Asia-Pacific (FAX - commentary - Trade Now), Bank of America (BAC - commentary - Trade Now), Imperial Oil (IMO - commentary - Trade Now) and Eaton Vance (EVV - commentary - Trade Now).

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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.