Is This a Sucker Rally or Are We Climbing the Wall of Worry?

by: Tate Dwinnell

The much anticipated oversold bounce came in with a fury as oversold bounces often do, and it didn't take much to ignite the bulls as more of the mortgage mess became priced in. On Tuesday, news of a 1.4B Wells Fargo write down and Freddie cutting its dividend in half and raising 6B in capital failed to send the markets into a tailspin on Wednesday morning, which set the market up for a bull stampede. The bulls may have been reaching a bit, but they found a glimmer of hope in comments made from Fed Vice Chairman Kohn who reiterated concerns about economic uncertainty saying ""These uncertainties require flexible and pragmatic policy-making. ". The sentiment was echoed by Bernanke the following day, further cementing hopes of another rate cut at the Fed December 11th meeting.

So is this just a short lived suckers rally or something more? Is this the beginning of another major leg up as the market climbs a monumental wall of worry? By Investor Business Daily standards, the action on Wednesday was enough to confirm a new rally but this should not be a green light to get overly aggressive on the long side.

What is critical in my mind is how we digest the gains of last week. A light sell volume pull back would go a long way in lending validity to this market surge and provide opportunity to slowly add long exposure. As I mentioned in my after market report on Wednesday, the magnitude of the rise last week into key resistance levels has allowed for a decent area to put on a few short positions as a hedge, but I think the next two weeks will be critical in determining where this market is headed over the longer haul. The government bail out plan is expected to be revealed soon and the Fed has indicated they are remaining vigilant and not afraid to take further action.

Don't fight the Fed (or this administration) certainly continues to be at play in this market. It's just more of the same. Subprime and economic uncertainty tempered by government intervention and what will probably be a flood of overseas investment in US assets should keep the markets gyrating for many more months to come. It still pays to be cautious and sitting on a decent sized pile of cash at this point.