August 5, 2008

To say that the Fed whispered something sweet in the ears of the market is an understatement. All the major indices made gains in the range of 3%. Nasdaq closed at new highs on its current trend which is now the higher high that we were looking for. The S&P found some resistance at current highs, and was unable to push though today, but nonetheless, a stellar performance by the index.

I think the big question now is, whether this is a “buy the rumor and sell the news” scenario, where the ‘smart-money’ will takes its gains and cash out tomorrow. Point is that tomorrow is important to see whether the market can hold current price levels and build upon today’s gains, or will it regress and give back most or all of it, as has been the case of late when we get a strong rally. While we think it is wise to begin testing the waters to the long side, we urge caution in doing so. Scale into your positions over time, and not all at once. Don’t think you have to purchase a basket full of stocks all at once – that’s a dangerous maneuver.

Assuming we can get a few more positive economic reports out of the market in the days ahead like we did today, and oil can continue to falter, then the market should build on its current gains. The downside is that the market is in overbought conditions, and so is oil, so one could speculate that the market may be ready to pullback some on a short term basis. We’ll see.

Here’s the Nasdaq and S&P Charts…