An Irrational Market by Charles Rotblut

The decline in stock prices on Friday morning suggests that the market may have finally succumbed to bad news.

Throughout the week, the bear market rally kept the S&P 500 above its 50-day moving average. A warning from Intel Corporation (INTC), bad sales data from Wal-Mart Stores, Inc. (WMT) and revelations that Satyam Computer (SAY) was cooking the books didn't deter traders from buying stocks.

But news that December nonfarm payroll losses were basically inline with expectations does seem to be taking stocks lower. And the actual numbers were far better than ADP's revised methodology suggested they would be. Go figure...

Some traders like to say that the market is always right. The reality is that over the short-term, the efficient market hypothesis does not hold up. Traders can be irrational. When stocks start moving in one direction, many people feel an emotional pressure to join the trend, even if that is the wrong thing to do.

It is this reason why bear market rallies are dangerous. If you are an aggressive, short-term trader, pay attention to whether the S&P 500 is overbought or oversold. And if you are a long-term investor, don't try to time this market.

No one knows where the S&P 500 will trade a month from now or 2 months from now. My expectation is that we will continue to see volatility. The good news, however, is that the economy will eventually recover.

President-elect Obama's stimulus package should help. However, Congress has tendency to move slower than anybody likes and it will take time to implement the new spending even after the legislation is signed into law.

This is why we have not rushed to add stocks to our portfolios even as stocks rose higher. We're being selective about what we buy, and so should you.

Zacks Elite Portfolio Updates
We are locking in an approximate 17% gain on Compass Minerals International, Inc. (CMP). The stock was added to the Growth & Income portfolio in early November, but is now a Zacks #4 Rank ("sell") stock.

The Markets
As stated above the S&P 500 is trading above its 50-day moving average. The upward breakout occurred on volume that was average, which suggested a lack of conviction that the upward move would hold.


Treasuries have pulled back a little, but remain at lofty prices. There are investors so scared about losing money, they are willing to sacrifice income for capital preservation. This is not the type of behavior that fuels sustainable rallies in stock prices.

Adding to investor fears is the unraveling of Ponzi schemes. Civil charges are being brought against Joseph S. Forte, who may have cost investors $50 million. Expect others besides Forte and Bernie Madoff to be caught as the tough economic environment makes maintaining investment scams difficult.


Charles Rotblut is the Vice President of Web Content for Zacks Investment Research and the Senior Market Analyst for Zacks.com. He oversees the editorial staff, manages the market-beating Focus List, Timely Buys and Top 10 portfolios, and plays an instrumental role in the development of new products. For more information, visit http://www.zacks.com

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