It is believed that the large Thursday's rise was strongly supported by the fact that there were many traders closing short positions to collect their profits. To close short positions, which are designed to make money when assets go down, traders need to buy the asset; adding to the upward pressure from others who felt that prices dropped far enough to make them cheap to buy again.
There is also the fact that the Federal Reserve has an announcement scheduled for next week. From reading my post, you would already know that stocks topped during Federal Reserve Chairman Ben Bernanke's testimony to congress. So, everybody will be paying attention to his words attempting to anticipate how much will the Fed continue to distort markets through their monetary intervention.
|Boom and Bust Cycle's Reversion to the Mean|
After the recent drop in prices, the Efficient Markets Theory would suggest that the risk is to the upside. Recall that no market moves in a straight line. All markets tend to push high further than they should, resulting in bubbles. Markets then correct lower than equilibrium, creating crashes. So for now, there is the chance that markets have temporarily pushed too far to the downside.
In general, there are plenty of factors which will probably push market prices higher in the near term. This means that those who feel that the economic strength is not what it seems will take any price increase as an opportunity to raise cash.
While equity and bonds markets do not directly impact our "real" economy, our "real' economy impacts these markets as well as our businesses and our lives in general. To me, asset markets are therefore great indicators of what is happening to the real economy, if not the creator of such changes.
We are now in an economy where the white house is on an business witch-hunt, bonds are vulnerable, housing is sitting on poor foundations, equities are valued by jittery capital and where there is no fundamental full-time employment growth or long term capital investment. Whenever the market decides to price these factors, asset prices will go down, perhaps by quite a bit, thus making cash the king of the market.