Why Did Stocks Bounce Today?

First of all, nobody can explain with 100% certainty why the market does what it does, but I'll take a shot at explaining why stocks bounced today.

In the above chart we have the Home Building Index (HGX).. The chart below that in red is a ratio line of the home building Index compared to the S&P. If the ratio line is falling, home building stocks are weaker than the S&P, if the ratio line is rising home building stocks are stronger than the S&P.

Over the past few days, home building stocks have been one of the weakest groups leading us down. Notice how the ratio line has been in a down trend over the past few days indicating that home builders have been weaker than the market.

Now I want you to look at what the ratio line did today. It diverged from price. As the HGX index and the S&P made new lows at 1:00, the ratio line diverged and began making a higher low. This indicates strength on a short term basis. When I say short term, I mean day trading or just for today.

One of my rules is that when the leader stops leading, you're probably going to see some kind of a pullback and that's what we saw this afternoon. Home builders stopped leading us down, so that put us at risk for a bounce up today.

If you don't look at ratios or relative strength, you still would have seen the potential for a rally this afternoon. All you had to do was look at the individual home building stocks and you would have seen that many of them stopped going down. Stocks like LEN, BZH TOL and RYL all made higher lows in the face of a falling market. These stocks didn't even take out yesterday's lows. When the leaders stop leading, time to get off the ride. Again, this example is just for today and nothing else. I'm still bearish on the market.

Some of you might disagree with my opinion as to why we bounced, but I trade this stuff and I watched it unfold before my eyes today. I think it's important to watch stock action and always be aware of what the leaders on any given day or week are doing. With that in mind, what is moving or leading the market at the moment are home builders, lenders/subprime, brokers and the Japanese yen. Those are the stocks and currency I'd be focused on. In other words,you don't want to be looking at semiconductors or Internet stocks for market direction. Remember there was a time that tech stocks were the leaders? That was such a long long time ago....(sigh)