Wednesday, April 11, 2007

Back in the Box

On Wednesday, Wall Street served up a dish that required its own dose of antacids.

If a pre-earnings rally in the midst of an economic slowdown seemed odd to you, Wednesday's action suggests that you weren't so crazy after all. The indexes slid, volume swelled, internals were dreadful and all ten market sectors -- plus bonds -- closed lower.

This is the sign of a market that's re-pricing itself.

How low stocks fall is another thing altogether. The IBD100 fell twice as far as the NASDAQ did on Wednesday, shedding 1.4%. Normally this is a bad sign, and it may ultimately prove to be an important warning shot. However, breadth told a slightly different story.

23 of 100 stocks on the IBD100 moved higher on Wednesday, which sounds low until you consider that on the NDX, just 10 stocks moved up. Also, of the 77 IBD100 losers, only 20 printed distribution days. That's a low ratio for a 2X price move. Leading stocks held up better on Wednesday than one might expect.

IBD100 or not, the Composite slid back into the box on the highest volume in seven sessions. It's also a chart that suggests more downside lays ahead.

Image Hosted by

The mainstream press says that investors had placed too great an expectation on a rate cut, and today's Fed minutes provided a sobering reality check. Perhaps, but a look at the BKX below makes this generalization very unlikely. The Banks have been weak and struggling to hold their own BECAUSE there wouldn't be a rate cut. The Banks knew -- as did anyone with a TV or an internet connection -- and today's BKX tumble is more likely a comment on earnings. The chart below is also a troubling sign for the broader market.

Image Hosted by

On Wednesday, investors sold most everything. However, rotation will begin soon enough, and that process creates opportunities. For example, Biotechs caught a bid at the end of the day, and Commodities of all species outperformed as well. Both of these sectors have been leadership groups, and neither are particularly rate-sensitive. Keep an eye of these two groups moving forward.

Image Hosted by
Image Hosted by

Two days ago the TOF Ratio triggered a Buy signal. Amidst the selling on Wednesday, option investors flipped to calls, keeping the Buy signal on. This indicator is subject to whiplash, so it will be interesting following its progress in this environment.

Image Hosted by

As snap has shown us repeatedly, looking at inverted charts can be very revealing. QID does a good job of this, and it's making a decent case for a bull flag. The volume is a popularity contest -- not supply and demand -- and it shows that QID had Sanjaya numbers on Wednesday.

Image Hosted by

The market's flashing caution signals again. Long or short, just follow the volume and you'll stay ahead of the game.

Until tomorrow, have a great evening.



No comments: