Tricky.

The market perked back up yesterday, particularly techs and small cap stocks.  This is where things get tricky. 

While the S&P 500 or small caps were never in negative territory early on, the main strength of the rally began after out TSP deadline.  By afternoon we knew we'd have to wait another day and a half to get into the stock funds and that makes it tough to pull the trigger.  Is this a head fake move up or is it as impressive as it appeared?  Of course we don't know for sure.  That's why we check the indicators.

The shorter term overbought/oversold indicators stretched deep into overbought territory during the rally.  That could mean a day of rest today but there is still much uncertainty for next week.  If the market can rally in the face of short and intermediate term overbought conditions, it would be an impressive sign of strength.  So does the market have the strength to move to new highs?

Today is options expiration day and while most days during options expiration week (OEW) tend to be stronger than random, the Friday of OEW is well below a random Friday's action.  The blue bars  in the chart below represent the days of OEW.

The week following OEW (in red) tends to be weaker than a random week. I haven't shown this chart in a while.  It is only a seven year sample but you can clearly see the distinction between the two weeks. 


                             Chart provided courtesy of www.sentimentrader.com


Bonds took a hit yesterday but the trend remains up.  They also closed well off their lows of the day.


                                Chart provided courtesy of www.decisionpoint.com

If stocks continue to rally, the return in bonds will not be too impressive, even if they continue to move higher.  But if stocks struggle, it will be a nice bonus to pick up a small gain in bonds.  We just have to be on the look out for a break in this short term higher trend.

We are in the middle of earnings season.  We have oil moving closer to the all time highs, we have Iran and Bin Laden in the news.  The Japanese Nikkei is jumping up and down like a cat on a hot tin roof lately.  It is options expiration Friday, and in a week and a half, Alan Greenspan will retire and The Fed will make an important decision on interest rates.  Whether you are bullish or bearish, I suspect the next few weeks will bring with it volatility that will keep everyone on the edge of their seats.  This is when I envy those folks who don't even pay attention.

I am currently 100% F fund but I'm not ruling anything out as a short term possibility.  Stocks gave an impressive performance Thursday and a strong follow through could get my attention.  But then again, next week is post options expiration week.  Oy!  Thanks for reading.  Have a great weekend.