I can't explain it.  Should we follow the herd?

Let's see, we have oil near $60 a barrel, we saw a terrorist attack on Thursday, we are in the seasonally weaker part of the year, earnings warnings and negative reports have been coming out every day, there are only 20% bears according to the AAII Sentiment Survey, a 50,000 miss in the jobs report, nine consecutive interest rate hikes with no end in sight, the overbought/oversold indicator is still overbought, yet we had an amazingly impressive two days in the market last week. 

The reversal Thursday and the huge rally Friday certainly has my attention and I know it has many of our readers' attention as the emails come in asking me why I am not in the S fund.  The regular readers of this column know why, but that doesn't help the folks following me who missed Friday's action.  While the rally was all that and more, the S&P 500 is actually still below where it was just over two weeks ago.  Can it continue up or will the pullback resume? 

About that lower than expected jobs report;  Jason Goepfert at sentimentrader.com tells us this:

"...one of the worst things for the bulls to see would be a positive market reaction to a positive jobs number surprise. Well, we got one of each, as the market had a very good day off a worse-than-expected payroll report. Since the beginning of 2002, there have been 5 other instances of the S&P gaining 10 points on a day the jobs report came in less than expected. 5 days later, the S&P was an average of 15 points lower, with 3 of the 5 being negative (all from 2002). 30 days later, 4 out of the 5 were negative (including occurrences from 2004 and 2005), and the average loss in the S&P was 25 points. If we relax the parameters a bit and just look at any time when the S&P gained 5 points or more on the day of the jobs report (no matter if there was a positive or negative payroll number), then since the beginning of 2004 the S&P was negative 30 days later 5 of 6 times. The tendency of the market has been to reverse the initial reaction to these jobs numbers, and it is a consistent enough tendency to garner our attention." - Jason Goepfert

My indicators are still telling me to be cautious but they are not flawless.  Last July they were on the wrong side of the market for about six weeks.  So should we follow the indicators, or follow the herd?  Did anybody see this article last week?  It reminded me of the current situation:

450 Sheep Jump to Their Deaths in Turkey
First one sheep jumped to its death. Then stunned Turkish shepherds, who had left the herd to graze while they had breakfast, watched as nearly 1,500 others followed, each leaping off the same cliff, Turkish media reported.  In the end, 450 dead animals lay on top of one another in a billowy white pile, the Aksam newspaper said. Those who jumped later were saved as the pile got higher and the fall more cushioned, Aksam reported.  "There's nothing we can do. They're all wasted," Nevzat Bayhan, a member of one of 26 families whose sheep were grazing together in the herd, was quoted as saying by Aksam.  The estimated loss to families in the town of Gevas, located in Van province in eastern Turkey, tops $100,000, a significant amount of money in a country where average GDP per head is around $2,700.  "Every family had an average of 20 sheep," Aksam quoted another villager, Abdullah Hazar as saying. "But now only a few families have sheep left. It's going to be hard for us."

I'm not sure if it's the people in stocks that are doing the jumping, or us that are on the sidelines.  Being in cash is never a horrible strategy during uncertain times, but missing big rallies makes it feel like a crime.  But with stories like this looming...

BRITAIN’S terrorist alert has been raised to its highest-ever level because the London rush-hour bombers are alive and planning another attack, The Times has learnt.

...I think it's a little reckless to be overly aggressive in stocks.

I keep mentioning my indicators.  They are certainly not just random readings.  They seem to see in advance what the market may see later on down the road.  But getting the market to cooperate is the difficult part.  They had me in protection mode beginning in early June.  The market just hasn't reacted that badly.  But the news is coming out now, a month later...

From Nat Worden
...economic growth appears to be on the wane. The government reported last week that GDP grew 3.8% in the first quarter, down from its annual growth rate of 4.4% in 2004. Furthermore, although corporate profits remain strong by historical standards, their growth is also slowing.

Wall Street analysts expect year-over-year growth in corporate profits for the S&P 500 to slow to 11.9% in 2005, down from 20.2% in 2004, according to consensus estimates reported by Thomson First Call. While the second quarter is expected to see the slowest growth of the year, at 7.3%, bulls have pinned their hopes on a stronger second half. Analysts expect profits to add 15.1% in the third quarter, down from last year's pace of 16.8%. For the fourth quarter, they're projecting growth of 12.2%, down from last year's 19.7%.