Market Update: Lower Before Higher, But Probably Survivable After a relatively rocky start, the market rebounded somewhat on Monday; the S&P closed only 0.8% lower after being in the hole by more than 2.0% at one point in the day. That's a good showing from the bulls despite the net loss at the end of the day.  The bigger question, however, is whether or not the market is out of the woods yet. My answer? Not quite yet. We're close, but despite my generally-bullish expectation I don't think we're quite where we need to be yet in terms of conviction and confidence.  Here's what I'm seeing...    The VIX Is Still Hangin' On I haven't looked at the CBOE Volatility Index (or VIX) lately, mostly because there hasn't been much reason to. The market has been wildly volatile over the last month - bullishly - so the VIX was apt to be tough to read anyway.  As we've all settled in a bit though, digesting the possibility that we really could have made a bottom already, the VIX should (and I stress 'should') be taking a more meaningful shape. If that is indeed the case, then frankly, I think we still have a reason for concern. Just as a quick refresher, a falling VIX is generally bullish for stocks, indicative of growing confidence in the market. A rising VIX is generally bearish for stocks, as it shows investors are becoming and acting more fearful of stocks. When the VIX hits an extreme reading though, a reversal may be around the corner. (That's the Q&D lesson anyway.) But why focus on the VIX instead of the actual market index charts? Because the VIX has been far less deceptive than any of the major stock indices have been - especially lately. So... The truth of the matter is the VIX is still showing some fairly significant doubt about this rally. Last week ended the best four-week period we've seen in years, but more than a few traders are betting against further upside. How do I know? because the VIX hasn't really moved on to new multi-week lows.  Maybe it's just hedging. It probably is, in fact. However, the worry/doubt that materializes as a persistently high VIX reading is the same worry/doubt that will keep potential buyers out of the market, thus ending the rally pretty quickly.  Specifically, the VIX is still finding some strong support around 39.0... support that extends back to early January. We can also a plot a slightly rising support line from there, as each VIX low has been marginally higher than the last. Mostly though, I'm just watching the 39 area as support. The encouraging aspect of the chart is how the VIX s at least making lower highs, even if it's not making lower lows yet. As long as it keeps making those lower highs, eventually, the lower lows will follow. (That, or we'll break that upper resistance line, and open a whole new can of bearish worms. Yikes. I don't think that's in the cards though.) Do I think the VIX can immediately move under 39 from its current level while the market continues to add to its already-standing 23% rally? In a word, no.  Don't get me wrong - there's nothing I'd like more than to see the Dow hit 14,000 tomorrow. I just don't think it's likely. Stocks have been overbought for several days now, so we're rallying on borrowed time.  What I'd like to see is a healthy pullback to (1) quell any unbridled enthusiasm, and (2) give the late-comers something of a second chance at getting into stocks.  The key to surviving any slight selloff would be halting the pullback at a level that wasn't discouraging to the existing bulls, but still deep enough to where anybody who missed the first leg of the rally would actually be interested in buying again. As for where that might be - and this is just a guess - I'm looking around the 790/797 range for the S&P 500. That's where you'll find a key Fibonacci retracement line, as well as the 20 and 50 day moving average lines (which gave us a bullish crossover today). If we can make that modest pullback happen, it would be a considerably healthier choice (i.e. sustainable) than to keep rallying, guns-a-blazin'. If 790 doesn't hold, then all bets are off. The long shot is more rallying in the immediate future, pushing the S&P 500 past 877 without taking a break in the meantime. That could be very rewarding to the bulls, but also an incredibly dangerous situation to deal with the first time the market falters afterwards. Like I said though, I think the 'modest pullback' theory holds the most water.    The New & Improved SmallCapNetwork.com Maybe you noticed some big changes to the SmallCapNetwork website, but if you haven't yet, allow us to introduce you to them. We've added all new content categories to the existing ones. The new ones are Small Cap Stock Analysis, Penny Stock Analysis, and Stocks in Focus. We've also added a few new contributors too, who are just as excited as we are to bring you even more and better trading ideas.  The newest additions are only the beginning of several upgrades we intend to add over the next several weeks. We'll let you know as we roll each one out. The ultimate goal is to establish smallcapnetwork.com as THE premier site in small cap stocks.  In the meantime if there's a stock you'd like us to review, just let us know... we can probably accommodate you. (Sorry - no pink sheet stocks. The information on them is spotty at best.) If it's a small cap stock, so much the better.        Tech Sector, Semiconductor Stocks Showing Divergences I don't know if the economy is reliving the glory days we experienced in the late 90's or between 2003 and 2007.However, what I've seen from the tech sector recently - semiconductor integrated circuit makers in particular - continues to make me think the worst is behind us. Is the whole industry doing well? Nope, not at all - that's the point. Some of these companies are doing fine, such as RF Micro Devices Inc. (RFMD). Others are not doing well, like Amkor Technology Inc. (AMKR).  That divergence suggests to me that the recession did its job, which was weeding out the leaders from the laggards. As things get back to normal, the leaders' stocks will be let out from under a crushing pressure that holds even the best of equities down. For example....  In the first calendar quarter of 2009, or RF Micro Devices fourth fiscal quarter, the company reported revenue had dropped off by the expected amount (semis are seasonal). That's not 'good' in the sense that investors would love to see consecutive increases in every single quarter. However, for demand to not get butchered is relative victory.  RF Micro Devices did something even better though.... the company retried about $22 million in convertible notes, and improved its cash position by about 10% by adding $28 million to its coffers; the total is now $266 million.  Oh, the company also mentioned that demand started to pick up as the quarter progressed, and they actually ended the quarter with a significant inventory reduction (which was a planned response to the 2008 contraction).  To read the rest of the story (and to view the charts), click here.