Top Line: The stock market staged an unexpected rally on Tuesday. Most thought the market was going to head back down to test the lows immediately. Whatever selloff occurs should not deter us from the greater goal of much higher prices later in the year.
Some news turned stocks around this morning. The Treasury Secretary said that most banks were well capitalized which spurred buying in banks and stocks in general. This talk is in the midst of the bank "stress tests" that have everyone worried that banks will get F's on the Test.
The media still thinks the story is the bearish one where stocks are on the verge of collapse. Our primary focus is to try to get an idea when the public is getting back into the market. The bear market caused a lot of emotional selling because people thought prices would go to zero. There was much bad news associated with the timing of the market drop which gave people added incentive to "trust" their emotions and sell.
We think the public's fear is measured in the volatility indexes. VXO stands near 40 and will surely drop substantially as the market advances. What we are looking for is public conviction that the market is going up once more. The mood was decidedly negative over the past six months or so which drove the public to sell. We think that mood will go 180 degrees in the other direction.
This first snap back rally after the long bear market drop from October 2007 to March 2009 should provide enough euphoria for us contrarians to feel confident selling our positions and start to think about going short again. From where we sit, it looks as though people think there is too much risk in the stock market. That doesn't fit with our sell point so we will not sell (except for some fun trading).