Tuesday, April 03, 2007

Stocks Surprise to the Upside

A little good news went a long way today.

For the past three days, the Composite has gapped higher at the open, only to fade and eventually close unchanged. On Tuesday the NASDAQ did it again, gapping higher at the open for a fourth straight day. However, this time the gains held. Stocks rallied broadly higher as volume surged 13%.

Monday offered some important signs that change was brewing. Monday was a long travel day for me, but on a layover in Dallas, I saw TOF had picked up on something unusual that I had noticed just moments earlier.

By early Monday afternoon, the indexes were fading once again. However, this time option investors were buying calls like crazy. I checked the IBD100, and it was up 0.9% as 72 of 100 stocks were printing gains. Also, NYSE internals were overwhelming positive. Beneath Monday's index sag, a stealth rally was underway.

That rally broke out into the open on Tuesday. All of the indexes are now back above their 50-days, and market internals were very strong. 3 of every 4 shares traded on Tuesday was a Buy, and New Highs clobbered New Lows 468-83.

The IBD100 added 1.1% on Tuesday as 72 of 100 stocks closed higher. It's worth noting that Jonah Keri at Investors Business Daily was disappointed that the IBD100 didn't do better. It barely kept up with the SPX and was beaten by the NASDAQ. Considering the current rally has seen very few heavy-volume updays, this is worth keeping an eye on.

The NASDAQ needs to break out of this box, but today's action was a vivid technical improvement. All of the indicators suggest that stocks have room to run.

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As we mull over prospects for the economy, copper continues to give strong signals that things are better than many suspect. It's up 39% off the Feb low. Over the next several months, it will be interesting to learn what this oft-cited leading indicator was really saying.

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Rattled by the mortgage fiasco and a stubborn Fed, Financials are now 5 weeks into some heavy volatility. That said, the BKX continues to fight hard at its 200-day. If the Banks can avoid the dreaded 50-day Death Cross, the IT uptrend remains intact and the broader market stands a chance at fully recovering.

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Hats off to you Snap, as I think your Up/Down Sentiment Poll is a great idea. I suggest to everyone that we run this poll just as Snap has set it up. It's simple and worth a serious beta trial. For the record, midweek revisions defeat the purpose of a weekly poll. You can always change how you trade, but leave your vote as is. It's most valuable in advance of the action.

Sentiment polls are useful for their contrarian value. Like the Snap Poll, Lowrisk.com's poll flipped strongly bearish this weekend. As has happened with each bearish reading at this level, stocks rallied shortly thereafter. It will be interesting to see how the Snap Poll, lowrisk.com and the market correlate going forward. I know I voted "Down", and with two trading days left, my vote will likely become yet another contrarian statistic.

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The tightly-wound market surprised many and broke to the upside today. The fundamental picture is pretty dicey, so Tuesday's action was an impressive eye-opener. However, the markets are hardly out-of-the-woods. For the current rally to truly bear fruit, four important things (among dozens of others) must happen:

1. The market must continue shaking off bad news. Earnings season will provide lots of opportunities for this.
2. The Financials must participate.
3. Leading stocks need to consistently outperform the broader market.
4. Market internals -- advancers, buy volume and new highs -- must stay strong.

The headwinds are strong, but the stakes shifted on Tuesday. The rest of the week should be interesting.

Until then, have a great evening.



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