So, Venezuelan president Hugo Chavez is offering to mediate some kind of peace for Muammar Qaddafi and Libya. That's a bit like Ben Bernanke offering up a plan to fight inflation.
Stocks rallied on the news and oil prices are dropping. Gold is even looking to reverse course.
Now, it's still early in the day. We've seen stocks reverse early gains and trade lower recently. But the strong early reaction to this news would seem to suggest that stocks want to push higher.
I know, it sounds like a flimsy excuse to take stocks higher, and gold and oil lower. It's hard to imagine that any settlement in Libya that doesn't remove Qaddafi would pacify Libyan rebels. It wouldn't do much to discourage unrest in Iran, or elsewhere. And it certainly doesn't affect the underlying inflation concerns.
Food and energy prices were rising long before the protests began in the Middle East.
But then, we have to wonder if the correction that began on February 22 was a fundamental event, or was it purely technical. In other words, did the selling begin because of underlying weakness in the economy? Or did investors simply decide that it was time to take profits?
There's plenty of reason to think that investors simply decided to start taking profits. The rally for stocks has now lasted twice as long as the average move has, before a 5% correction. The S&P 500 has doubled since the March 2009 lows. We could go on and on with the technical reasons that stocks are overbought.
And the same is true for the fundamentals. Inflation is rising, especially in emerging markets, and that may mean less spending and lower corporate profits. Interest rates may be poised to rise, and austerity measures from Congress could mean slower improvement for unemployment, GDP growth and spending.
We might also ask if it even matters if stocks sell off for technical or fundamental reasons. I think it does. Because the distinction is helps us decide if we are looking to buy a dip, or take profits and stand aside for a while.
Jason Cimpl, the trading strategist for TradeMaster Daily Stock Alerts wrote a great pre-market piece for his members today, and I can't help quoting a bit from it...
While it's advisable to stay with the trend as long as you can, sometimes that could result in buying at a top or selling at a bottom. Stop losses can prevent large defeats, but nothing can prevent the shake-out volatility corresponding to market reversals. The fact is that we are all slaves to the market's direction. And while certain trades can fight the trend, 75% of them will move in the same direction of the market. And sometimes that direction is sideways or down.
For now, we have a clear bullish trend. But as mentioned before, it is long overdue to correct. We will continue to favor buyers, but all the while understand that we may have a few losers as the market turns.
I should point out that Jason runs a trading service and his holding period for positions is between a couple days to a couple months. He doesn't try to ride losers out, but instead takes losses quickly and moves on. Jason's done a remarkable job sticking with bullish trend that started in late August, knocking down gains like 40% on CCME, 50% on ALJ and 55% on HILL.
In fact, he called that rally so perfectly, I chided him into doing a video seminar to show us how he did it. That video, which we like to call a "webinar" airs March 4, at 6 pm ET.
Jason is clearly telling us that he's not looking for more upside right away. But with that said, stocks can work out of overbought territory with a sideways move, as well as with a downside move. Still let's be aware that, right now, stocks appear to be reacting to news in an almost whimsical way, which means caution is absolutely the right way to proceed. So we should be hesitant to jump on rallies, and equally skeptical about sell-offs, at least until we see some support/resistance levels fall. For those of you trading at home, those levels on the S&P 500 are 1,335 for resistance and 1,300 for support. I can tell you, too, that Jason is expecting a move to secondary support on the S&P 500 at 1,280.
One thing I'll be watching is semiconductor stocks. We've discussed the virtuous cycle that's been in place since Apple (Nasdaq:AAPL) released it's iPad tablet. People love the tablets. Motorola (NYSE:MMI) just released its XOOM tablet and Apple released iPad 2 yesterday.
Strong tablet (and smartphone) sales are pushing new chip designs, increased wireless subscribers for carriers, higher data traffic and wireless app sales. So pay attention to chip stocks like Qualcomm (Nasdaq:QCOM) and Nvidia (Nasdaq:NVDA), carriers like Verizon (NYSE:VZ), data traffic companies like Akamai (Nasdaq:AKAM) and F5 Networks (Nasdaq:FFIV) and wireless app companies like NetFlix (Nasdaq:NFLX).
These stocks have sold off lately, even though the whole wireless tablet/smartphone market is really in its infancy. Apple's iPad2 release should push all these stocks higher. If it doesn't, that will tell us a lot about the bullish/bearish bias of investors.