Thursday, January 11, 2007

Tech Stocks Break Out!

After a 2-month consolidation, the NASDAQ finally lifted off to a new 6-year high today.

It was a meaningful break out of Snap's famous box, and the heavy volume was accompanied by spectacular market internals. 70% of all stocks moved higher, 7 of every 10 shares traded was a buy, and New Highs outpaced New Lows, 414-66. Market internals rarely get better than that.

Today's action also validated the accuracy of a few tools used to help decipher cryptic market behavior: the IBD100, investor sentiment and the TOF Ratio. If you'll recall, while the markets have been cagey all week, the IBD100 has been very strong. It had big gains, breakouts, record highs and bullish internals, while the broader market just wobbled.

Investor and blogger sentiment readings by, AAII and the Birinyi Group had grown very bearish over the past many weeks, even as the indexes barely could slide down to their 50-days. This is contrarian bullish of course, though few would admit they thought the markets were setting up to move higher.

Finally, there's Richard's TOF Ratio. We all have much to thank Richard for, but as a TA practitioner, dividing the NASDAQ by the Put/Call Ratio was a stroke of genius. A few headfakes aside, the TOF Ratio hasn't steered me wrong since I first started following it years ago at Clearstation, and this week was no different. Thanks, Richard.

The chart below cuts a fine profile tonight. It's important to recognize that seasoned pros are very much in control of this market, and today's intraday behavior showed a very deliberate accumulation pattern. Whenever price started to get overheated, the buying would stop and price would slide back down to regroup. This constant back-filling is an indicator of strategy and tactics. There's very little irrational exuberence present in this type of market behavior, and it's no accident today wasn't some runaway 2% up day.

Image Hosted by

The winner today wasn't even tech stocks, it was the RUT. While pros and amateurs alike keep trying to write off small-caps, in real-life they continue to show amazing resilience. The chart below is technically challenged, but outperformance on a NASDAQ breakout day is a positive step forward.

Image Hosted by

DNA threw down big numbers last night, and Biotech had a great day today. Tech stocks are likely to outperform in 2007, and this group is a key part of that universe. It's also the riskiest part of the tech space. When the BTK is rallying, it's a sign that the market is healthy. The BTK closed just 1.9% below a 6-year high, and 4.9% below a new all-time high of 811.

Image Hosted by

The Tech Index followed-through on its second straight 6-year high today. Meanwhile, the SOX struggled and actually closed lower. This is why the Tech Index underperformed both the NASDAQ and NDX today.

The tech universe has changed dramatically since 1999. The fact that the NASDAQ and NDX can break out to record highs without the help of the SOX is a testament to the diversity of today's flash-memory universe. Tne NASDAQ needs the SOX, but not like it used to. Below are both the Tech Index and the SOX.

Image Hosted by
Image Hosted by

Meanwhile, MSFT had a fantastic day. Vista was named CES Product of the Year, and there's buzz they'll beat Q4 estimates. Money is flowing into tech stocks, and it's noteworthy that AAPL, INTC, MSFT, YHOO, LVLT, DELL, CSCO, MRVL, NVDA, JNPR and numerous other tech names are having strong weeks. Today was no headfake, and the signs are everywhere that this rally has legs.

Image Hosted by

Tonight, the media is all over the rotation from commodities into technology, but regular readers of these Updates know that this rotation started in July and resumed last week. The chart below tagged a 5-year high today, and it continues to put in its best performance since the 2002 bottom. Crude closed below $53 tonight, and seems destined to reach into the 40's before it's all over. That will only drive this chart higher, which is good for the broader market.

Image Hosted by

Strong employment data was part of the reason stocks rallied today. Amazingly, steady rumors of the consumer's demise continue to be disproven almost with every report. As a result, Consumer Discretionary stocks have returned to sit just below a new all-time high.

Image Hosted by

You know the market has some pep when it can break out at the same time that yields do! Yields sit near historic lows, and even though investors whine for a rate cut, a cut is a sign the economy is weakening. It's much more healthy when rates move like they did today: in parallel with stocks.

Image Hosted by

Speaking of economic strength, the Transports haven't given up the ghost either. Some of this is fuel cost relief of course, but that isn't enough to make a lasting difference. Investors have bid up the $TRAN since it touched its 200-day three weeks ago, and it will be interesting to see if they're on to something.

Image Hosted by

Finally, the trusty TOF Ratio flipped its red arrow to orange today. The call buying and NASDAQ price strength drove the two lines apart, which is good for the market. This chart has room to run.

Image Hosted by

Even though the market demonstrated important strength today, lots of investors remain very skeptical. It's almost as if the market did a bad thing today - lol.

I read one blogger who insisted today's break upwards was bearish behavior. "This is bad, this is bad! The market needs more time...more consolidating". Another blogger complained in Nov and Dec that the market was weak because the NASDAQ wasn't confirming the NYSE. Today, the same guy said the market was weak because the NYSE wasn't confirming the NASDAQ. I assure you, when everything starts moving in the same direction is when you need to start worrying!

It's good to know the wall of worry is still strong and sturdy. Doubtful sentiment is good of course, and it's helpful that large numbers of investors remain unconvinced. That said, anything can happen, so always keep your eye on the volume.

The IBD100 and the TOF Ratio don't hurt either!

Have a great night.



No comments: