How High Can a Dead Cat Bounce?

I admit that I am not a great predictor of the stock market's performance from one day to another. But given today's rally after almost a week of the stock market savagely selling off, I'll give the next few days a shot. Is it a dead cat bounce? Or is it a start of a traditional year-end rally?

First of all, the S&P 500 reached 1481 today, 9 points away from a major resistance level at 1490. I'm not a big technician but there are lots of people that will be paying attention to this. If the S&P 500 can build a solid base above the 1490 level over the next few days that will be bullish for the market continuing to move back up.

There is no doubt that tech stocks were oversold after yesterday. But that doesn't mean they can't still go down - a lot. One analyst issued a bullish note on Baidu this morning saying that the vicious sell off offered an entry point into a stock that had gone straight up the last month. All of the big tech high fliers made strong moves up today including Google, Apple, Research in Motion, Cisco and Baidu. Even EMC, which has made a dramatic reversal, started to move up again today.

In a volatile market like this you know the market is going to continue to make sharp moves up and down. You just don't know when. In a situation like this professional traders will sell into the strength and then buy weakness. Once technical resistance is solidly breached the pros will be more comfortable buying strength.

This is options expiration week which makes everything more unpredictable for the next few days. If tech stocks begin trading in a solid up pattern tomorrow it would not surprise me if the upward trend accelerates as investors and money managers become fearful that tech stocks will recover and that they risk missing the move. The battle tomorrow will be between "selling into strength" and "chasing the rally".

Will nervous traders cash in today's profits or will buyers overwhelm sellers tomorrow?

Oil was down a good bit today, causing the refiners to rally strongly. Shoulder season for the refiners is about over and the cracking spreads are widening again. The refiners could be in for a good run.

The financial sector has bounced strongly the last few days. Some of this is hedge funds covering short positions to lock in profits they made on the way down. Some of it is genuine recovery. But I think the financials will go down more before the credit mess is cleaned up. In no way have all the impacts of subprime damage been revealed. The SIV fund being created by the big banks with the supervision and encouragement of the U.S. Treasury Department will not stop the demise - just make the demise more orderly.

The lone victor on the investment firm front seems to be Goldman Sachs. For I think the eighth time Goldman Sachs, this time through a presentation by the CEO at a conference, reiterated that Goldman had no serious write downs due to subprime. The eighth time must have been the charm because just after this pronouncement the stock shot up continued rallying into the close.

The tape will continue to be choppy the rest of this week. After options expiration I am can see some further retrenchment, but overall I am optimistic about going into a relatively strong year-end run. Good luck tomorrow.

Disclosure: at the time of this posting the author was long GOOG, RIMM, AAPL, CSCO, BIDU, EMC, TSO, VLO, SPY, and GS and short USO.