We all witnessed the massive late day rally yesterday into the close. The Dow Jones Industrial Average surged higher by nearly 400.00 points in the final 45 minutes before the close at the New York Stock Exchange. The late day surge caused many traders to cover their short positions. When a trader covers a short position they must buy back the stock or equity that they sold short, therefore, it actually causes more upside momentum than would normally take place. Often after a rally of yesterday’s magnitude the stock markets will trade higher for a few days or even more sometimes.
Many investors in the financial media have now taken off their bear costumes and have now switched into their bull costumes. Last night, I heard from countless people on popular cable TV networks that the lows are in for the stock market and there is nothing but upside from here. While anything can happen in the market it is important to note that one day does not make a trend. It is important to see a follow through day and even a follow through week. At this time, we do not have either, so these talking heads should wait before anointing the next bull market.
There is something else that traders should watch closely and that is leading stocks. This morning, Apple Inc (NASDAQ:AAPL), Biadu Inc (NASDAQ:BIDU), and Google Inc (NASDAQ:GOOG) are trading sharply lower. If this is another leg of a bull market these stocks will normally be trading higher. Leading stocks must lead not lag, these stocks are lagging this morning. The financial stocks are also not showing any upside momentum yet either. These stocks will need to signal strength if this market is to show further upside action. So there you have it, don’t be so quick to anoint the next bull after a one day oversold rally.