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Testing the other side of the Range


I ended yesterday's commentary with; the near-term range on the S&P 500 remains 875-945. A move to the lower end of the range (which I expect) would likely create an oversold condition and set the stage for a bounce back to the upper end of the range. The news after the close last night is likely to cause a move lower and test that thesis. While there were a couple of better than expected reports, the bulk of Q4 statements were less than stellar and as a result, it looks like a bit more pressure is likely - at least in the early going. Both IBM and Microsoft (MSFT) are getting hit based on their quarterly reports and analyst's reaction to them.

I continue to believe that psychology is dominating the movements of the market. Did anyone really expect NOT to find any indications of weapons of mass destruction in Iraq? Did anyone really think that earnings would blow away expectations in the quarter where the Fed saw enough economic weakness that they lowered short-term interest rates by a wider than expected 50 basis-points? What is dominating the swings in the market is expectations of whether the current or forward news is more important on any given day or week.

When the market becomes overbought and is at the upper end of the trading range, traders are looking for reasons to take profits and find them in the current news backdrop. When stocks reach the lower end of the trading range and become oversold, traders look for a reason to buy them and find it in the potential impact of lower interest rates on future economic growth and valuations combined with the historical returns of the market in the third year of a President's term and after three down years.

The recent weakness (I am including the early part of today) in the market should bring the indices and the stocks that comprise them back down to the lower end of the near-term trading range. I have defined that as roughly 875 on the S&P 500. As we approach that level, the struggle will be to avoid becoming too negative, just as the struggle three days ago was to avoid becoming too positive. Going toward the opening, it certainly appears as though sentiment is shifting heavily to the negative camp, which means as the markets approach oversold and near-term support, searching for entry points may be the best strategy.

These are very dicey times and as Todd has been so solid in pointing out - it is normally good to sell hope and buy despair. It is likely to feel like despair in pretty short order today so please try to remember that in the market - as in life, things are rarely as good or as bad as they seem at any given moment. I have to keep this short because I am off to CNNfn again for the final day of my guest-hosting gig. I will be on from 9:30-11:30am est. Have a great day.
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I wonder if they have enough makeup to cover my head! No positions in stocks mentioned.
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