Low Volume Bounce Does Not A Bull Market Make.

Today's action was impressive. But like all rally attempts lately, it was on weak volume. The Nasdaq finished up $21.75 on below average 17,033,400 volume. The S&P 500 gained 1.1% up $15.11 on below average volume of 14,606,600. The volume was weak across other major indices. This is typical of the type of bounces in the market after a down week in a newly established bear phase market. It would be too premature until the market confirms the new uptrend on strong volume and one of the major averages advancing more than 1.5%. So far that has not materialized. These types of bounces have trapped many bulls lately and the best course of action in these environment is in cash, as I have harped on this issue countlessly before. Or, if you are adventuresome, you can go short or trade the volatility on both the long and short side (not recommended), but certainly opportunities exists.

Having said that, I do not see any reason to believe that the markets are healthy or that even a bottom has been reached. Historically speaking the bottom may not even be formed until at least 5 to 6 weeks into the correction. I do not think it will happen that soon. The 400+ point drop few weeks back has severely damaged the technical conditions of our market. Technical analysis is akin to psychology trading and much psychological damage amongst investors have been done. It will take time to heal these wounds. Once time heals the wounds, I may consider going long, but for now, I will stay with the trend.

Economic developments today gave a bounce today across the markets. At least for a day, we put some of the subprime worries in the back burner. But be aware, do not discount the subprime issues. Mega merger news across the globe gave this beaten down market a much needed bounce. I am now slowly keeping an eye on the follow through of this market and see if this market can regain the uptrend. Many of the prior leaders today have regained their 50 EDMA or is close to it. Still many others are stagnating and are churning. More on that as things develop. The last thing that I want to do is to get caught with my shorts down when the market turns, which can be sudden. But again, I do not think we are there yet.

NYSE has recored record margin levels since 2000. Subprime investigation by SEC is widening. ALT-A Loan chatter is growing. China just riased interest rates by 27 basis points. Wall street is bracing for corporate earnings slow down. Automobile industry (domestic) is in shambles. Inflationary pressure appears to be rising. Japanese carry trade is dwindling.
All of these chatter represent the prescient issues associated with our market today. Tomorrow, FOMC meeting will be held to decide on the monetary policy. I do not anticipate any action but it is their wording that will matter tomorrow. The FED must contend with growing chatter of subprime issues sending our economy into a recession versus fighting inflation. I don't think the FED is in a good position because anything that they do will likely harm this economy. Choose your poision.