Thursday, March 22, 2007

Still Looking Good

So far, the rally continues to look OK.

Thursday's fractional pullback on lower volume was a near-perfect response to Wednesday's big surge. Large institutional investors hung on to their positions, and small- and mid-cap stocks actually edged higher.

The IBD100 gave positive signals on Thursday as well. It added 0.5% as 54 of 100 stocks moved higher. More importantly, 31 stocks tagged record highs, an unusually large number. As nastar pointed out, the IBD100 has already recovered from the Feb 27 selloff and hit new 2007 highs. This action shows that investor appetite for companies with excellent fundamentals remains strong. This is critical to a rally's success, and suggests that the current one still has further to go.

Adding Volume-by-Price to the chart below shows the heavy level of congestion the market's trying to work through. By comparison, the gap just above carries less baggage. The Money Flow line is clean and smooth, but ADX is tangled, OBV needs a positive day, and MACD is a mess. Add in the overbought stochastics and and you can see why it's called resistance.

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As the recession risk debate continues, it's worth pointing out that on Thursday one of the two Yield Curve metrics officially became un-inverted. The 2-year Treasury yield is now lower than the 10-year Yield, a situation that hasn't existed for seven months. The more persnickety 3-month/10-year inversion still remains in place, but that's to be expected. It generally lags the 2-year in both directions, but is also falling quickly. What this means is debatable, but it certainly doesn't strengthen the case for a recession.

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The rally is young and faces formidible fundamental and technical headwinds. Of course, the same was true in August. A few distribution days in a short period of time will derail this market, but until that happens, keep an eye on your watchlist for promising opportunities.

As always, your odds improve if you avoid buying or selling on weak volume.

Have a good one.



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