The market spiked early on Friday, but was unable to hold onto those gains, finishing near flat on the day. Yesterday we saw a similar story play out, with stocks unable to hold overnight gains. The lack of follow-through to the upside is a concern for the bulls as it appears investors are unwilling to chase stocks at higher prices without some definitive resolution to the Euro crisis. Bond yields have started to subside, however, providing some relief to Europe's most indebted nations.
There are two factors to keep an eye on over the next few weeks that could possibly ignite a bounce. Bearish market sentiment is creeping back toward climactic levels, a development that has preceded every major rally over the past few months. The modern market typically moves in a way that will cause maximum pain for the players involved. In this case, speculators are piling back in to the short side, and a quick, steep rally next week could ignite short covering to drive the market even further to the upside. Seasonal trends would also favor a rally over the next few weeks.
Also, while some leading momentum stocks have been getting hit hard this week, the financials have not shown their characteristic relative weakness. If the financials can start to catch a bid, it would likely key a rally. We are seeing a wave of firings at the big banks, and the adage says to buy the market when banks are firing, and sell stocks when banks are hiring.
*DISCLOSURES: Scott Redler is long OIH
