It's Tough to Be an Optimist Here

To live is to change, and to be perfect is to have changed often.
-- John Henry Newman

The most troubling aspect of the recent market action is that so many investors seem anxious to declare that nothing much has really changed. Yes, we had some problems with subprime loans, and liquidity has dried up, but we have known the issues with real estate and debt for a long time, and the central banks are going to help us out if things get worse. In addition, the economy is still strong and stocks are cheap, therefore the market should revert back to the upbeat action we saw in the first half of the year.

This resistance to the idea that things may have changed is what always sets the stage for painful market pullbacks. Market players are masters of denial. They want to believe the status quo will persist even when confronted with dramatic events that indicate that change is afoot.

The big question right now is whether the optimists are correct in arguing that the market is sufficiently discounting the credit/debt issues and the associated fallout. Can the international economy keep humming along and get this market uptrend back on track?

Rather than rely on opinions and feelings about the macro picture, let's take a look at the technical pattern of the major indices. Do they support the proposition that the market is going to rebound and resume the uptrend that started last August?

The S&P 500 does not look very promising in that regard. It is sitting right at its 200-day simple moving average and has broken below the uptrend lines formed over the past year. That doesn't mean that it can't find support and rebound, but it does mean that upside momentum is broken, and betting on a 'V' shaped recovery is not a good idea.

The other major indices are similarly challenged. The small-caps are in worse shape than the others, and the DJIA and Nasdaq are a bit better, but none of them are particularly healthy or provide comfort that a bottom is forming. In fact, the danger of another downleg is quite high given the formations, and you can bet that technicians are watching to see if recent lows hold.

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James "Rev Shark" De Porre is the founder and CEO of Shark Asset Management, an SEC-registered investment advisory firm. He also operates sharkinvesting.com, an interactive online community that serves and educates active investors. De Porre 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 to send him an email.