Monday, March 26, 2007

Stocks Bounce Back

It's unlikely that US investors actually are on crack -- or chloral hydrate for that matter -- though they do appear to have developed a surprising immunity to weak housing data.

After recovering in a matter of days from the sprawling subprime mortgage fiasco, stocks spent all of 15 minutes Monday morning grieving the corpse of positively dreadful new home sales. After a sharp, 15-minute selloff, stocks climbed for the rest of the day, with the NASDAQ and SPX even managing a positive close.

Market internals reveal this was no accident either. Composite volume accelerated 5%, and New Highs dwarfed new Lows 322-62. The internals also revealed just what a stockpicker's market this really is: 63% of all the shares traded on Monday were buying just 44% of available stocks. Breadth took a hit, but the pros knew exactly what they wanted to buy.

Stocks on the IBD100 continue to be on that list. The fundamental leadership gained ground yet again on Monday, and a remarkable 24 of 100 stocks on the IBD100 tagged record highs. One of the most reliable canaries of future market direction, this index is not giving signals of a market that's ready to fall apart.

Considering Monday's low volume, the chart below looks suspiciously like the pros were at work. This is just speculation, but it appears that investors used the weak housing data to pull the bid down precisely to the 50-day, then scoop the now-on-sale stocks all back up again. If it seems odd to buy this market in the face of such grim economic data, there looms an even greater oddity: where are all the sellers?

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In addition to last week's 5-10-20 index Buy signals, more buy signals continue to emerge. Positive MACD crossovers occurred last week for the NDX, today for the SPX, and tomorrow most likely for the NASDAQ. Next to moving average crossovers, MACD crossing above zero is one of the original TA buy signals.

Yesterday over at the VIX board I noted that the recent VIX spike points to a decent IT entry point for stocks as well.  No signal is ever perfect, but stocks historically have fared well after similar VIX bursts.  If you toss in the much-discussed 9-to-1 day and the unusually bearish investor sentiment, a good mix exists for a tradable rally going forward. For those of you who haven't spent much time at the VIX board, Bill Luby (Bobo) is posting some amazing work both over there and at his blog, Vix and More.

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The 60-minute chart below shows how buying bullishly accelerated into the final hour, closing the NASDAQ literally at its high of the day. End of month, end of quarter, tax season, Bernanke testifying to Congress on Wednesday -- and this chart -- all point to the possibility of more gains this week.

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Considering the housing data, today's action was definitely surprising. However, the market has had a bullish bias since the Day 6 follow-through, and today's reversal shows that bias is still in place.

Tomorrow we get consumer confidence data, which is expected to dip lower for March.

Until then, have a great evening.



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