The markets rallied with the Dow tacking on +112 points but the internals are telling a different story.

I hate to wake up on Monday mornings to see the shorts running for cover when I am flat. The rally on Monday came on the back of a high profile upgrade to the banking sector by Goldman Sachs, which saw the banking index rise +3%. There was also a positive ISM non-Manufacturing report helping feed the short squeeze. Add in a couple of strong buy programs and stir until you get a +112 point gain.

Unfortunately it came on the second lowest volume in the last three weeks of barely 7.6 billion shares. Decent volume is over 10 billion. The AD ratio was positive 3:1 but the majority of the positive stocks were only up fractionally.

Last Wednesday was the end of the quarter. We saw some fund managers head for the exits on two 10 billion share days of Thr/Fri. However, the start of any new quarter always sees an influx of new retirement contributions and I am sure that helped feed the buy programs on Monday. Remember, we really have not seen any major buy programs since Sept-17th.

Also, the Dow rallied to stall at 9625 and exactly the resistance from late August. This is exactly where it should have failed on a low volume advance.

Dow Chart

The next couple days will be key. There are no material economic reports due out on Tuesday and although Alcoa will kick off the Dow earnings cycle on Wednesday the stock has already rallied more than 5% off its lows. It would have to knock the cover off the ball to push much higher. Since the Baltic Dry Index of overseas shipping prices has been very weak recently I believe the buying frenzy for aluminum may have cooled. China was stockpiling commodities including aluminum back in Q4/Q1 but reportedly they have slacked off over the last quarter. Alcoa's guidance will be crucial for predicting what other materials stocks and stocks in general might report for Q3.

The Dow winners on Monday were JPM, CAT, CVX, MMM and XOM. Oil prices moved back over $70 on the weaker dollar. Banks and oil stocks were major movers and both from external inputs. It was not a buying frenzy by retail traders but short squeezes and a currency play.

I know this is getting old BUT, I still believe the best play for Tuesday is no play at all. One days gains on low volume does not make a trend. The markets were down for 7 of the last 8 days before Monday. They were due for an oversold bounce on any positive news. If the Dow moves over resistance on Tuesday I will consider entering some plays but I am waiting for the market to convince me I am wrong rather than tease me with a one day wonder.

Please be patient and let's wait for a signal before making any plays.

Jim Brown