Friday, January 12, 2007

NASDAQ Follows-through to 6-year High

While the NASDAQ closed above 2500 for the first time since Feb 2001, today marked the 23rd all-time high for the Dow since October.

Stocks did some heavy lifting today, and it was an unusual show of strength going into a 3-day weekend. What happened today was not impulsive, reactionary buying either. Like yesterday, the action was controlled accumulation, and the pros never let the trading get overheated. As a result, the major indexes all printed perfect white candles, but no index gain exceeded 0.85%. This steady, patient behavior is a good sign.

Investors didn't labor over NASDAQ 2500 either. After an initial approach and pullback, the Composite crossed 2500 and stayed there. The importance of 2500 is more psychological than technical, but the immediate conversion of resistance into support was a positive sign nonetheless.

Even though NASDAQ volume slid 7%, the market internals remained excellent all day. 60% of stocks moved higher, seven of every ten shares traded was a buy, and New Highs trounced New Lows, 391-41. Selloffs in two big winners -- VOL (-16%) and SNP (-8%) -- stung the IBD100 today, limiting it to just a 0.4% gain. However, a solid 63 of 100 stocks moved higher, and an above-average 17 stocks hit new highs. Money continues to pour into the best of breed.

The NASDAQ closed literally at its high of the day -- 2502.82 -- which is rare and bullish behavior. It's also made the chart ST overbought, but that's what the strongest rallies do: they move a chart to overbought and then keep it there for a while.

It all depends on your investing style of course, but many investors have now started the phase of investing that actually makes them the money -- the sitting phase - lol. Generally, once you're positioned, the worst thing you can do with a chart like this is to try and outsmart it. I don't set targets. Up or down, I usually just sit back, keep an open mind, and wait for the next signal. However, that's just me.

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Below is a performance chart thus far for 2007. Investors are selling things on the right and buying things on the left. You can see the weakness in oil, gold and bonds, and the strength of tech. Who would have imagined the lowly USD outperforming the SPX?

As the story goes, the action in this chart sets the tone for the rest of the year in the so-called January effect. However, it lacks sufficient economic science for my taste. Instead, I prefer Super Bowl outcomes, election year seasonality and Bradley turn dates - lol.

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It's Friday and time for some weekly charts.

The Composite weekly looks excellent, and every indicator points to further upside. One of the key strengths of this chart is that it saw just two distribution weeks since the July breakout. This showed that investors had little interest in unwinding their positions, and was the earliest signal suggesting more buying ahead. Note the healthy pullback to the 50-day before this week's breakout.

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The strength of Biotech can really be seen in its weekly chart. The BTK is climbing nicely out of a high handle, and stocks from this group look ready to outperform in 2007.

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Brokers did particularly well this week, as the the appetite for deal-making in 2007 shows no signs of abating. Historically, when the Brokers do well, so does the broader market.

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Retail sales data today corroborated yesterday's employment data. Both conspire to tell the story of a consumer who is using his paycheck -- not his home equity -- to continue to buy stuff. This is also the best indicator yet that the economy continues on track for a soft landing.

Christmas season may not have been epic, but it was hardly a weakling either. As a result, Consumer Discretionary is showing amazing strength. Electronics and high-end are outperforming.

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Investor sentiment is sending contrarian bullish signals almost as if the bulls had sent them a script. First, Mark Hulbert points out that his Newsletter Sentiment Indicator has fallen 20 percentage points since Nov, while the Dow has actually climbed 200 points since then. A 2% gain made investors 27% more bearish, which is a perfect reaction.

Secondly, the AAII Bull Ratio below reacted to this week's breakout by falling. Instead of making investors feel confident, the broad market move higher actually spooked them. What's encouraging is that various sentiment indicators are saying similar things, namely that skepticism remains healthy.

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Finally, the TOF Ratio backed off today, which was perfect. The SMA lines are tight, but still seperate. They're also not that way on the EMA version. The strengths and weaknesses of the SMA vs EMA versions of the TOF Ratio are making themselves known in this market, and eventually it will be worth further discussion.

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Earnings season is heating up, and so far it's been better-than-expected. Also, the economic data has surprised to the upside this week. Things are setting up for the market to continue doing well, and next week is OE which should add a touch of drama as well.

Until then, have a great three-day weekend.



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