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"Technical? Fundamental? Which Rally Will It Be?"

By Helene Meisler
RealMoney.com Contributor
2/1/2010 7:00 AM EST

"One of my favorite Wall Street-isms is when folks tell you the move in the market is "technical." What does that mean? Does that mean that only technicians are playing the market? Does that mean the fundamentalists are sitting this one out?

Or does it mean, "I have no idea why the market is moving and since I never saw this move coming because the fundamentals are so good I must blame it on something?" Why not blame it on more sellers than buyers?

Two weeks ago, there were several folks in Columnist Conversation proclaiming how great all the charts looked. At the time I chimed in and noted that I had a button that reads, "If it looks great, it's too late." And now the charts all look awful. How good did they look at last March's low? Not particularly terrific then either. I don't have a button that says anything about charts looking awful.

Folks, we lifted off the lows last March when fundamentals were horrible, when they stunk. Charts looked bad too. Yet we lifted. Stocks might have been "cheap" on valuation but they were cheap on valuation in November 2008 too. They were cheap on valuation in January 2009 too. In March we finally decided enough was enough. Well, it seems that in mid-January we finally decided enough was enough, and it was time for a correction.

Fundamentals are always good at the highs or we wouldn't be at highs. Everyone was convinced earnings (fundamentals) were terrific and so the market that never corrected would continue to never correct. At some point good news -- be it fundamental, economical, or yes, even technical -- gets priced in. Markets are anticipatory. So blaming the charts or the technicals for the poor action is simply making excuses.

It's the same way all those conspiracy theorists said the market didn't correct because there was some invisible hand buying all the time. That's hogwash.

In the course of a correction we ought to have a down move that at first is scoffed at (we've seen that already when stock after stock went down on good news beginning in the latter part of the first week of January). Then folks begin to accept the decline. They start finding reasons we're going down. Sure, right now many are blaming the technicals since the fundamentals haven't changed -- yet. Some are blaming the folks in Washington for being clueless (well, OK, at least we all agree on something here). And it's usually right around that point that we have some sort of oversold rally.

I won't harp on my theme for an oversold rally this week since I started harping on it last Wednesday, so by now you know where I stand: I think we get an oversold rally this week.

Now after the kind of decline we've had it would be only natural for any oversold rally to meet sellers the first time up. Heck, human nature is to protect ourselves (and our money) and so when given the opportunity to get even or get out with a minor loss, we take it.

My indicators, which didn't work well in the latter part of 2009, will typically give us three- to six-week cycles in the market. This is an approximation. But the first move down should come in the first two to three weeks. Then we should enjoy some sort of mid-way oversold rally (or overbought dip in an uptrend) that then stalls out and comes down again.

I find it problematic that the CBOE Volatility Index didn't get jumpy late last week. I had expected it to back off last week and then re-rally as the market came back down, but it didn't. I suppose there is the possibility that we have a huge gap down Monday morning that gets the VIX back up but my indicators aren't meant to find patterns such as gaps up and gaps down. They are intended to tell us when I think we're getting too stretched and too oversold. And I think this week that's the case.

Of course, if we rally this week -- and yes, it's still a big IF -- will the folks who blamed the decline on the technicals tell us the rally is technical or will they tell us we're rallying because fundamentals are so good? "

(in www.realmoney.com)