Traders Jump On for a Quick Rally Ride

By Aaron L. Task
Senior Writer
TheStreet.com
02/27/2003 06:17 PM EST

On an intraday basis, Thursday's session provided evidence of the notion that in a range-bound market, rallies are for selling and selloffs are for buying.

The Dow Jones Industrial Average closed up 1% to 7884.99 vs. its early best of 7924.62, reached at around 11 a.m. EST. The S&P 500 gained 1.2% to 827.28 after having traded as high as 842.19, while the Nasdaq Composite rose 1.6% to 1323.96 vs. its apex of 1331.80.

After a brief setback in the opening 30 minutes of trading, shares rallied steadily until hitting their intraday peaks shortly after 11 a.m. EST. The early gains were presumably aided by a better-than-expected durable goods report, a lowering of the government's terror alert level and some apparent concessions from Saddam Hussein regarding banned missiles.

I say presumably because I still believe the market's daily gyrations are less the result of geopolitical events than is commonly ascribed, and more due to technical factors and other considerations.

The apparent eagerness of professional traders is in sharp contrast to the outlook of retail investors, at least judging by mutual fund data. Equity mutual funds suffered outflows of $466 million in January, the Investment Company Institute reported Thursday. That's less than the $1 billion of outflows estimated by Lipper, as The Wall Street Journal reported Monday, but it nevertheless confirms the first January of outflows from equity funds since 1990.

Certainly it was far-fetched to think that Hussein's pledge to destroy the al-Samoud missiles would be sufficient to end the threat of war, and President Bush said as much late morning. Shortly thereafter, United Nations chief weapons inspector Hans Blix was quoted as saying Iraq's disarmament has been "very limited" to date, buttressing the president's hard-line stance. (Meanwhile, the U.N. Security Council conducted a closed-door meeting to discuss the Iraq situation, and Blix is scheduled to address the council this weekend.)

Rethinking Dow Theory

Earlier in the week, I noted how the Dow Jones Transportation Average violated its October (and 52-week) lows intraday Tuesday. The question, I wondered, is whether the Dow Industrials would follow suit and "confirm" that move.

Over lunch in San Francisco today, I ran that by Jack Schannep, editor of Schannep's Timing Indicator and TheDowTheory.com. He suggested that what's more important than the intraday breach of the October lows is that the Transports then rebounded and closed well above that level of 2008. He also noted that the Dow remains well above its October lows of around 7197.

"The market is still above the October lows and does not yet qualify for a renewed bear market," Schannep wrote in his most recent letter, referring to cyclical moves vs. secular ones. "And yet, with world events so incredibly precarious, it seems prudent to be half in and half out, waiting to see what happens next."

Some might say it's more prudent to be totally out of stocks, but then again, you wouldn't want to might miss the next rally, would you?

Aaron L. Task writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to Aaron L. Task. JRaess: Aaron L. Task writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to Aaron L. Task.