Wednesday, April 18, 2007

Stocks Hang Tough

On a day tailor-made for a sharp fall, sellers had difficulty making it happen on Wednesday.

Given the grim after-hours sentiment Tuesday evening -- which extended to the futures Wednesday morning -- it was surprising to see the Dow, SPX and NYSE all print record highs on Wednesday. Despite the NASDAQ notching its 3rd distribution day since the March 21 follow-through, sellers had a hard time holding prices lower. On a 5% volume surge, the Composite gap didn't close on Wednesday.

The positive MACD divergence -- though slight -- is very visible this evening. However, divergence or not, if price doesn't hold at 2480, it's going to get ugly.

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One of the big reasons stocks held up on Wednesday was the impressive follow-through day by the Financials. This week's tame inflation data has ignited a fresh round of rate cut buzz. Personally, I'm very skeptical, but bond investors aren't, and they've driven yields 2.3% lower in just 3 days. Banks are eating this up -- and decent earnings aren't hurting either.

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Investors rotated into beaten up stocks on Wednesday -- like semiconductors, homebuilders, banks, etc. -- and leading stocks took a breather. The IBD100 was off 0.5% as just 32 stocks moved higher.

Meanwhile, the SOX saw its best accumulation in 8 weeks. Chip stocks made up 8 of the 11 biggest gainers on the NDX Wednesday. For the semis, today's action was nice, but in truth it doesn't mean much. For it to stick, the SOX needs follow-through -- quickly. For the SOX to gain any credibility, it needs to break above 500.

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It's worth noting that contrarian analysis continues to point to more gains. A new article by Mark Hulbert describes that even though the stock market is back to its pre-correction highs, his Newsletter Sentiment Index is HALF the value it was at the start of the correction. Historically, this is very unusual -- and very bullish. At the February high, the HSNSI stood at 62.4%, and on Monday it closed at 34.1%. Meanwhile, the SPX, Dow, NYSE, RUT and MID are all higher! This is not what you typically see at a market top.

Investor Sentiment from points to the same thing. Last week, as the stock market bullishly reversed and closed higher, bullish sentiment actually FELL from 39% to 33%.

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It's hard to imagine the market getting through this week without some seriously volatile chop, but I'm never one to fight the tape either. I'm surprised the gap is still open, but the futures currently show sellers will likely get another crack at it tomorrow.

Since it's OE, there's probably a load of hurt that's yet to hit the fan.

Until then, have a great evening.




Bill Luby said...

Speaking of the HSNSI, I thought you might appreciate the analysis of that indicator that that the CXO Advisory group published today: Mark Hulbert's Stock Newsletter Sentiment Index (Last Updated 4/26/07)

Interesting reading and a favorable conclusion: "In summary, the Hulbert Stock Newsletter Sentiment Index may have some predictive power for future stock returns. The available sample suggests, with selection bias as a caution, that its contrarian signal is most reliable for very low values of the index and short-term stock returns."

Also if you follow the link at the bottom of the article, you can see additional research (through May 2006) that the CXO Advisory Group has done in the area of sentiment: Blog Synthesis: Sentimental Journey

Good trading!


dk said...

Interesting as well is this week's Ticker Sense blogger sentiment survey. As I point out in 13,000, it's got a long-standing (and relentless) bearish twang. However, stretching to fresh bearish highs as the market climbs is classic contrarian bullish.

best as always