Skeptical Traders Wait for Proof

A faith that hasn't been tested can't be trusted.

--Adrian Rogers

A strong earnings report from Citibank (C - commentary - Cramer's Take) is undoing much of the damage that was done by poor reports last night from Google (GOOG - commentary - Cramer's Take), Microsoft (MSFT - commentary - Cramer's Take) and Merrill Lynch (MER - commentary - Cramer's Take). Even a bounce in crude oil isn't enough to keep the S&P 500 and Dow Jones Industrial Average down, as the market continues to embrace the idea that maybe this time the worst really is over.

Ideally, what the market should see at this point is a mild pullback, some basing action to digest recent gains, and then strong follow through to indicate that there are some real buyers out there.

At the moment, we have a good bounce from badly oversold conditions, but nothing to really give us confidence that a lasting bottom is in. When we pull back, as we certainly will at some point, the real test of this bounce will come. We need buyers to show that they have faith and are willing to jump in when emotions start to cool as the impact of the recent good news is no longer as fresh.

Even though the indices have been up strongly two days in a row, the action has been extremely chaotic with some dramatic swings in sector leadership. The sectors that have been the strongest for many months, oil, steel, coal, solar energy, agriculture, etc., were destroyed Thursday, as financials delivered a huge short squeeze and drove up the indices. The only way to have kept pace with the indices was to have been fully invested in banks and brokers, which has not been a smart play for over a year.

When the market puts together a big bounce like it has the last couple days, it can cause a lot of conflicting emotions for the active market player. If you have been playing defense and holding cash, the great likelihood is that you have underperformed the market the last few days.

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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.