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The Intraday Dilemma



OK folks, here is the dilemma: Which is the market going to respond to first, structural or fundamental/technical forces?

I can make the case that the major equity indices may spike higher on the belief that today's reversal in bonds could begin another major bond-to-stock move. This time, instead of the aggressive funds driving the move, it could be led by individual investors who believe the big boys are doing it.

I can also make the case that, from a fundamental and technical framework, the market shouldn't be moving higher and should at best be going sideways to work off the intermediate-term overbought condition and allow enough time for the fundamentals to catch up to the valuations.

Going back to the question of what the market could respond to first: The market goes up and down based on supply and demand. Period. While any number of drivers affect the relationship between supply and demand, there have been many times over recent years that moves got exaggerated for structural reasons where fundamental and technical excuses were used.

I am not sure exactly what to make of the bond reversal until I know there really was one, and I think it will take more than a couple hours to determine that.

Here are the signs I am watching today:

• How will the S&P 500 cash act at 950?

• Will bonds remain weak into close, suggesting that buyers are exhausted after a big move?

• Will the dollar reverse course today, suggesting a possible oversold spike?

The bottom line is that stocks have slowed their advance lately due to concerns over the weaker dollar, a potential deflationary threat and the focus on the overbought and extended technical condition. The next couple of days and action in the currency and fixed income markets are going to go a long way in determining if these pressures are relieved or are here to stay. If they are relieved, and individuals take profits in fixed income vehicles and become more willing to take even a little bit more risk, the supply and demand dynamic will make a dramatic change -- even if it is a temporary one.

So it may not be possible to make a solid case for an advance or decline using fundamental or technical reasons. The direction may be determined by unexpected intermarket fluctuations.

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No positions in stocks mentioned.
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