Will Reversals in Oil and Banks Kill the Rally?

The most important quality in a leader is that of being acknowledged as such.
-- Andre Maurois

The bounce in financials and the free fall of energy are the two dominant themes in this market right now. The moves in those two sectors have been big and quick and have helped deliver a solid bounce for the broad market over the past week.

This combination of lower oil and relief in banks and brokers is really the ideal combination to support the market. In addition, the market seems to be forgiving weak earnings reports from the likes of Apple (AAPL - commentary - Cramer's Take), American Express (AXP - commentary - Cramer's Take) and Texas Instruments (TXN - commentary - Cramer's Take) and has managed to rally despite them.

That is where we stand now, but traders are now starting to wonder if maybe financials are due for some sort of pullback and energy due for a relief bounce. That doesn't seem to be an outrageous expectation, and we need to consider whether the market can continue to bounce higher should those themes start to reverse.

The key will not only be the degree of reversals, if any, in energy and banks, but whether the market can shift its focus elsewhere. As I discussed yesterday morning, we really need some additional leadership if the market is going to work higher from here. The good news is that technology stocks are showing a little more life now. Apple managed to bounce back from a dip on its earnings report, and reports from Baidu (BIDU - commentary - Cramer's Take), Amazon (AMZN - commentary - Cramer's Take) and Qualcomm (QCOM - commentary - Cramer's Take) are receiving a positive reaction this morning.

If technology stocks like IBM (IBM - commentary - Cramer's Take) and QCOM don't take a leadership role, then we need oil to keep falling and/or banks to keep bouncing. That might happen, but the nature of further upside will become suspect if we don't get a broader array of stocks with positive action.

One puzzling aspect is the relative outperformance of small-caps. The IWM -- the small-cap index -- actually managed a technical "follow-through" day and moved back over its 50-day simple moving average. None of the other major indices have managed that and I'm wondering how that divergence might correct. If the big-caps play catch-up with the small-caps, that will be extremely favorable, but it seems illogical that small-caps should be leading as we are wrestling with inflation and slowing economic growth.

At this point, the bulls have the advantage as long as the twin themes of lower oil and better banks prevail. However, that won't last long unless the upside strength broadens out.

We have a mixed start setting up, with strength in technology offsetting weakness elsewhere.

No positions.

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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.