Fear is driving the market

Today’s action was quite impressive. Strong volume. Very
strong breadth, both in terms of advancers/decliners and up/down volume. The S&P
500 held near support and the Nasdaq made a quick recovery after hitting new
lows yesterday. About a 2% rise for the Dow, Nasdaq and S&P is especially
impressive. Overall, I would say today’s action was enough to get a lot of
people excited…and fool them.

Why is it that buyers were in such a frenzy today? Was it the good news? You
know, the fact that CPI came in high…er…I mean, the fact that the country’s lead
economic policy advisor thinks the economy is slowing down. Hooray! We’re
looking at slowing growth and rising inflation! Everybody in the pool!

These were not the reasons for today’s rally. In Monday’s column I discussed the
fact that bear market rallies are extremely sharp because they are driven by
fear: Fear of being caught short; Fear of missing the bottom; Fear of not being
invested when the market is roaring higher. Today’s rally was not excitement
induced. It was fear induced. Just like 6/15 and just like 6/29. Those were some
impressive one-day rallies as well.

Assume for a moment my theory that we are in a bear market, or at least serious
correction, is true. (I know, big assumption.) Now let’s count the number of
days of days since the bear market began (May 10th) that the S&P 500 has risen
at least 1.75%…today, 6/29, and 6/15 — three. How many times did the S&P 500
rise 1.75% from August of 2003 to May 10, 2006? Two — 10/1/03 and 4/21/05. From
March 2003 through July it happened 10 times, which isn’t unusual at the
beginning of a new bull market. At the beginning there is still fear and doubt
about the move.

Is it possible the market has made a double bottom and this is the beginning of
a new strong, bull-move? Sure. I just don’t see enough evidence to back that up.
What I see is a series of fear-induced rallies similar to those that were
frequent from March 2000 — March 2003, when the S&P 500 rose 1.75% or more about
70 times.

Let the others get excited about this one. If it is for real, it will be
followed by leading stocks breaking out of sound basing formations and charging
higher. There’s none of that, yet. Make sure your short-list is in order. There
may be some opportunities soon.

Best of luck with your trading,



For those who may be looking to expand their
knowledge beyond just market timing, my

Hanna ETF Money Flow System
utilizes the VIX in generating trading
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Rob Hanna is the principal of a money
management firm located in Massachusetts. He has spent the last several years
developing and refining methods for trading in stocks across multiple time
frames. He selects stocks using both fundamental and technical criteria, and
then trades them using technical analysis techniques.