Sunday, April 29, 2007

Markets Float Higher

Hot air must have lifted the markets higher on Friday, because it certainly wasn't breadth or volume.

For the second straight session, the NASDAQ and Dow squeaked out record highs on declining volume and breadth. This is as close to an engraved invitation to a pullback as the market provides. That said, how much of a pullback is another thing altogether.

The bears have a compelling case. We're at month's end, and that "month" also happens to be May. Throw in Dow 13K and there's lots of reasons to go away in May this year. After the shaky GDP data, the ongoing housing woes, etc., several pundits are predicting a strong seasonal selloff.

On the other hand, the market itself suggests something different. Regardless of what the prognosticators are saying, there are few genuine signs that the big money is ready to pull the plug and go home. Things could easily change in just a few sessions, but for now the market itself reads as pullback, yes; selloff, no.

Remember that investor sentiment -- whether measured by Hulbert, AAII, lowrisk, Ticker Sense or even the VIX -- is more cautious now than it was in late Feb, even though earnings have surprised and the market is back above its Feb peak. A <4% dip could prove irresistible for those tardy, cautious investors to step back in.

It will be interesting to see where the market stands next Friday, and especially how we got there.

Getting back to market internals, Friday's action raises a great question: how can the indexes move higher on day that 6-out-of-10 stocks move lower? It's a living example of the distortion caused by index weighting. On Friday, the cap-weighted NDX added 0.08%, but an equal-weight ETF version of the NDX (QQEW) lost 0.41%. The indexes are just part of the picture, with market internals being essential to a complete understanding of the market's overall health. For the record, the IBD100 kept pace with the broader market (a good thing), slipping just 0.3%.

The chart below looks ripe for a pullback, but it's hardly telegraphing an immanent sleigh ride down to the 50-day either.

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The weekly chart clearly shows the impressive strength of this market. Volume has continuously accelerated, trend strength is now ascending, and MACD had a positive crossover this week.

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One of the biggest problems with the current market are the Banks. While the broader market is back above its pre-correction highs, the BKX isn't. The less rate-sensitive Brokers are in much better shape and sit just 3% off a new all-time high, a good sign. If the market is going to fall apart in the weeks ahead, the BKX will likely be the first to go and will lead the way down. For now, it continues to hang in there and bounced nicely off its 10-week.

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Technology had a decent week. The NDX clobbered the rest of the indexes and rallied 2.5% to a 6-year high on very strong volume. The SOX broke above 9-month resistance to close at a 52-week high, as did Networking. Currently, Software, Networking, Semis and Internet are all under noticeable accumulation. Below is the NDX and the SOX.

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It could be a bumpy ride for investors this week. The key thing to watch -- both on the indexes and with the stocks you own -- is the downside volume. If stocks fall under the weight of huge volume, ignore at your own risk. Otherwise, the odds favor a healthy pullback. Regardless, everyone's stomach for risk is different, so please season to taste.

I'm on the road Thursday-Monday, but should be able to check in as usual.

Hope you've had a great weekend, and best of luck this week!



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