Thursday, May 31, 2007


The NASDAQ gapped to a new 6-year high on Thursday and then stood its ground, a fitting end to an unusually strong May.

Just five sessions ago, the market stood at the brink of disaster. Even worse, it was the third time in May that the market had been there . Each time, just as the market seemed ready to fall apart, buyers stepped in to push the market to a new record high. The green arrows on the chart below shows this string of higher lows and higher highs, ending with Thursday's close above 2600 for the first time since Feb 2001.

A remarkable bid remains under this market, and three times it averted what could have been a terrible month. It's a reminder that TA graphs the forces of FA, and not the other way around. The three "failed" bearish formations are evidence that if investors want to buy (or sell!), it doesn't really matter what the charts look like.

Speaking of fundamentals, while the broader markets were mixed on Thursday, leading stocks rallied hard. The IBD100 gained 0.9% as a whopping 31 of 100 stocks hit record highs. This was the 4th straight day the IBD100 has outpaced the broader market, positive divergence that is usually very bullish for stocks.

The market internals are sending a similar message (see charts). May's three bearish threats took a toll on the internals, but most of that damage has been repaired.

The MACD divergence is the weakest link on the chart below. However, it's also printing a positive crossover, indicating momentum is accelerating again. If the buying is sustained, MACD can heal itself.

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Since bottoming in Jul 2006, the NASDAQ has been been up 8 of the past 10 months, and is finally pushing the Bollinger envelope open. Volume has been stronger on up-months, and all of the technical indicators suggest more gains ahead.

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A look at the subindexes shows important strength in critical areas.

--- The Transports hit an all time high on Thursday, as did the Brokers and the Cyclical Index.

--- Technology continues to flash important signals. Tech bears tend to focus on the SOX weakness, while ignoring the more important broader strength. For example, the Tech Index hit a record high on Thursday, as did Internet, Software, Networking and Telecom. In fact, Hardware and Semis are the only two tech subindexes NOT at record highs.

--- The Retail Index refuses to give up. It's climbing the right side of what appears to be a constructive base, and sits just 1.8% below an new all-time high.

Maybe not on Friday, but all of this suggests more gains ahead for stocks.



Wednesday, May 30, 2007

Shaking Off the Dragon

It's been very hectic this week, but I wanted to drop a quick post about the past two sessions.

The most bullish thing a market can do is to keep going higher. The second most bullish thing is to keep going higher while few people expect it. Stocks have pulled off a pair of low-probability upmoves this week that caught many by surprise. The odds were low because these moves required overcoming distribution days, divergence, bearish candles, poor sentiment, crappy internals, a stall in money flow and a surge in put buying.

It has also required ignoring weakness in the Chinese stock market. The Feb 27 Shanghai selloff rattled markets worldwide, and triggered a correction in US stocks. However, the next two Chinese selloffs in Apr and on Wednesday drew a yawn from US investors.

There appears to be some recognition that while the Chinese markets are correcting, the economy itself remains quite robust. This reaction is rational, encouraging and gives a fresh twist to that uniquely American expression: it's the economy, stupid.

As always, the most intriguing aspects of market action are often the imperfections. In this case, low volume is the elephant at the table. The NASDAQ tacked on 55 points in the past 3 sessions on volume 13% below average. Stocks are higher in part because of short covering.

However, market internals show that there's more to it than that. Breadth has improved, and both Up Volume and New Highs have accelerated. Also, the IBD100 has continued to outperform. It had one day of downside outperformance last week (the IBD100 version of a distribution day), but since then, it's outpaced the broader market higher.

The bears were unable to follow-through on last week's selloff, and the Composite is now parked just 0.3% below a 6-year high. Despite the light volume, various technical indicators have improved: MACD crossed over on Wednesday, Stochastics printed a higher low, and OBV has stayed positive.

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TOF made a couple of great observations in Tuesday's Old Fool Notes: when you try to write an obituary for this market, the words won't stick to the page; and the TOF Ratio still hasn't flashed a Sell.

My casual observation about the TOF Ratio is that the Sell signal is generated by the second 21-day/50-day crossover. The first 21-day touch (orange arrow) usually works as a warning, and stocks continue higher for a while. However, the second crossover (red arrow) is one to heed.

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Market action suggests that investors are focused more on this week's economic reports than they are on the overseas markets. Record highs on the SPX, Dow, WLSH, MID, RUT and NYSE point to a market expecting few surprises in these reports.

Should something unexpectedly negative appear, the bears will likely get another crack at pushing the market lower.



Sunday, May 27, 2007

Memorial Day Bounce

Friday's action was little more than a shallow, pre-holiday bounce.

Its most significant accomplishment was to delay any further decisions about the current pullback. Recent declines in various technical indicators -- the TOF Ratio, IBD100, MACD, OBV, Money Flow, etc. -- were suspended by Friday's low-volume rebound. The "strength" changed nothing, and stocks remain in pullback mode.

How deep and long this weakness lasts is impossible to know. The market flashed wobbles the entire month of May, making this downdraft probably the worst-kept secret on Wall Street. What effect this obviousness has on the pullback will be an interesting subplot to follow.

As price slides, it's important to note that fundamentally very little has changed. Bond yields climbed, but rates moving back towards 11-month-old Fed policy is hardly surprising. Greenspan and China? All Greenspan did was to say out loud what prudent investors suspect to be true anyway. Housing, jobs, manufacturing, the consumer -- recent data contained few genuine surprises in either direction.

Technically however, there are lots of reasons to sell. Finally at an all-time high, the SPX chose an ideal spot to pull back into a handle-like reassessment. The NASDAQ halting at 2600 has program trading written all over it. The NYSE is above the upper boundary of a 3-year channel. The thing about technical moves -- up or down -- is that they generally don't last long. Technical weirdness gets its business done and the trend resumes. Fundamental weirdness takes much, much longer.

The IBD100 and market internals were very strong on Friday, but the light volume rendered the action essentially meaningless. In the world of TA, the low-volume inside day on the chart below is like a day that never happened. The market could climb near-term, but TA says that it's a low probability move.

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For the bulls, the most promising chart continues to be the Composite weekly. The weekly chart shows consolidation, not collapse, and the key tell is 3 weeks of stable price closes on lower volume. Price has been volatile, but it held at the 10-week and all of the technical indicators remain in good shape.

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Thursday's 16.2% New-Home Sales pop caused quite a stir this week, but the big sales jump wasn't the most provocative part of the report. The fact that New-Home prices fell 11.2% -- the largest one-month tumble on record -- was the more critical development.

I've described before how economics teaches that price cuts are the final, painful step to a housing recovery. At long last, the builders are throwing in the towel, and it's these bargains that are stimulating demand. Unfortunately, this will also be the most excruciating part of the cycle for the builders as they finally book their losses.

The unfortunate part is that even with the New-Home price plunge, the housing debacle is far from over. New-Home sales are just 15% of the housing market. Existing-Home Sales are the real problem, and there isn't any evidence that sellers are ready to cave in and drop their asking prices. Watch for that. It will have a regional bias, but when existing home prices decline it will generate negative press. However, it will be the best bad news the housing market will ever receive.

Should the 50% retracement hold on the chart below, the 2005-2008 housing recession will go down as a moderate one. I suspect the HGX will likely break to new highs at the precise moment that the builders flip economically positive.

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Utilities require lots of capital and their revenues are regulated. This makes them very vulnerable to higher rates, and the Treasury yield rally has finally hit the Utes hard. After a fantastic run (40% in 13 months), they appear to have begun work on a new base. Unless the sweet divs are critical to your plan, it's not a bad time to take a little off table.

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The Transports -- like the Composite weekly -- continue to make the case that the current pullback will be minor. The bullish ascending triangle consolidation continues -- for now anyway. Note that CCI(20) has slipped below 100, a sign of weakness.

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Short-term, the market is in the throes of consolidation. This means up, down and sideways, with the bias being down. It's very tricky to trade, and you should have an investment profile that feels comfortable.

Based on multiple indicators, the odds suggest the current chop lasting for weeks, maybe even months. The market action won't be all down, but if the action feels gut-churning to you, it may be a sign that you have too much risk exposure.

Hope you're having a great Memorial Day weekend. I have a brother-in-law who's an Air Force Colonel in Afghanistan, and my thoughts and prayers are with him. He isn't due back stateside until July 2008, but that's why he gets paid the big bucks.

For any Travel Put fans, I'm flying on Tuesday morning. :)



Thursday, May 24, 2007

The Selling Hits

It's just a coincidence of course, but whenever I travel, it always seems that the market goes down. I 'm so used to seeing red while sitting in airports, that I even gave it a name:

The Travel Put.

Thursday extended the Travel Put streak, as stocks fell on a big jump in volume. The action inflicted significant technical damage, and with just a little more follow-through, it could be the unmistakable start of the Summertime Blues.

As the indexes fall towards support, the real problem is that the trifecta of secondary indicators I follow are weakening even faster.

First, the IBD100 had a bad day. It tumbled 2.2% -- farther than the broader market -- and a whopping 92 of 100 stocks closed lower. Even worse, the selling accelerated sharply, as 36 stocks printed distribution days. That's a big number, and is not a good sign on such a big price move.

Second, the market internals were lousy, and charts of the internals show that the weakness is picking up steam. The most troubling is the NASI, which has been struggling since the Feb selloff. NASI put in a lower low in March, and is now threatening to go even lower.

Third, the TOF Ratio is poised to print a Sell, as option investors have shifted to puts.

The chart below shows five key support levels for the NASDAQ. When the fundamental leadership, market internals and option metrics are all unanimous in their weakness, price support tends to be more porous. Also, none of the technical indicators offer much promise either, and the odds clearly favor lower prices.

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There was nowhere to hide on Thursday, as investors sold everything -- stocks, bonds, cyclicals, defensive, commodities, energy and precious metals. In fact, all 32 subindexes I follow closed lower. This is the unusual sign of a market being re-priced, and no hint of rotation was visible anywhere. It's ugly, though generally it's not a sustainable situation.

It's a great time to work on watchlists, paying particular attention to stocks which avoid the selling. Even more, it's definitely the time to be patient. Beware the Siren song of the first bounce. It will look seductive, but statistically most investors do better just strapping themselves to the mast and gritting it out.

Until tomorrow, have a great evening.



Wednesday, May 23, 2007

The Greenspan Put

Marketwatch posted a representative headline on Wednesday:

Stocks end lower after Greenspan's China comment. Let's listen in...

"...and they have this really cool flag with these five yellow stars..."

Regarded by many as financial America's crazy Uncle Al, Greenspan got blamed for yet another market event on Wednesday. The only problem is that the actual selling pressure started almost an hour after his comments hit the wire.

The mainstream press needs a "reason" for things, but observant investors know that Wednesday's reversal likely has its roots elsewhere. Distribution days, a wobbly TOF Ratio, negative MACD divergence and almost a million consecutive up days all point to a market in search of a rest.

As some lace up their grave-dancing shoes, it's worth noting that the sellers have their work cut out for them. While there's record short interest, massive option hedging, and a ProShares feeding frenzy, the IBD100 still isn't attracting any sellers. The IBD100 slipped the same as the NDX on Wednesday, but its breadth was better and it had 16 record highs. Most surprising of all, just 15 stocks printed distribution days. Within the fundamental leadership, the selling isn't off to a very good start. Of course, that can change very quickly.

Market internals were actually quite strong before the market reversed. Afterward, they were negative of course, but hardly lopsided. On a reversal day, New Highs still swamped New Lows, 483-81.

The market has given plenty of warnings to adjust risk to taste. Wednesday was the 4th distribution day in three weeks, MACD has diverged, stochastics are overbought, and that's a nasty-looking red candle. However, volume picked up just 4% after tracking much stronger earlier in the day. When the selling started, volume backed off.

Considering the Composite failed at exactly 2600, technical selling accounts for some of Wednesday's move. What happens next is impossible to know, but the chart below is certainly a wobbly piece of business.

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The bond market is finally throwing in the towel. Despite a housing and auto recession, the conditions for a rate cut simply aren't there. Both the FOMC and the stock market have consistently indicated this since summer 2006, but until recently, bond investors were unconvinced.

Greenspan wasn't alone on Wednesday, as rising rates were also blamed for the selloff. Maybe so, but the chart below shows that rising rates -- like the inevitable destiny of the Chinese stock market -- are a surprise to no one (the Banks certainly weren't surprised). Unless unemployment rises, rates will continue to meander towards 5.25%, and some of that bond money will eventually flow into the stock market.

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There's no way to know how much selling lays ahead. Technically, the market has been flashing a variety of warning signs, and if you aren't in your comfort zone by now, you could be in for a bumpy ride. Tomorrow and Friday see manufacturing and housing data, which sometimes moves the market and sometimes not.

Keep an eye on the fundamental leadership and the volume, and your odds of success are greatly increased. Watching the TOF Ratio doesn't hurt either.

I'm traveling tomorrow through June 3(?). See you from the road.



Tuesday, May 22, 2007

Split Personality

Tuesday was a Tale of Two Markets. On one hand, things looked OK; but every positive had an evil twin.

The NASDAQ and RUT ticked higher again, while the Dow edged lower for the second straight day. Market internals were strong again, but the overall volume continued to be lame. The IBD100 had strong internals, but it closed flat on the day.

However, the bigger problem was the TOF Ratio, and it had no upbeat doppelganger. Not only is short interest currently at record highs, on Tuesday option investors poured into puts. The CPC spiked higher, and as a result, the TOF Ratio is the worst it has looked in two months. It's hardly a Sell, but you can see one from here.

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The May pullback cost the Composite momentum, and the recent tepid gains have resulted in negative MACD divergence. Continued climbing heals divergence, but after three days of wimpy volume, the Composite now appears suspect. The NASDAQ has climbed 60 points in 5 days of below-average volume. This suggests short-covering, rather than bona fide accumulation.

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No market goes up every day, and this rally has had more than its fair share of up days. The past two weeks have seen a crop of distribution days and two giant call spikes on the TOF Ratio. Should the inevitable selling pressure arrive, the bigger question is how much downside momentum will it gather?

One thing missing from the Feb 27 selloff was a collapse of the IBD100. The rapid bounce-back was hinted at early because the fundamental leadership simply fell in sync with the broader market.

In contrast, May, 2006 was a very different experience. On several days, the NASDAQ fell 1.8%+ while the IBD100 tumbled a whopping 4.8% as 97 of 100 stocks closed lower! If the market is going to see a real, full-bore summer correction, the IBD100 will be among the first to let everyone know.

For now, the IBD100 looks good, as do a majority of stocks within the broader indexes. However, good looks can change easily. The market is waiting for Thursday and Friday's manufacturing and housing data. Until then, the catalysts are largely "who-bought-who".

Up or down, long or short, the simplest advice is to follow the volume. In price there is knowledge, but in volume there is truth.

Until tomorrow, have a great evening.



Top 30 Financial Blogs

Are you reading the right stuff? is a web information resource that -- among other things -- ranks websites by their traffic data.

Below is the May 2007 Alexa rankings I compiled of 30 popular financial blogs. The ranking is measured against all US websites in the Alexa universe, blogs or otherwise.

For this list, I excluded the huge financial behemoths, and to make the cut, each blog had to be ranked in the top 1,000,000 most popular US websites. Links to most of these blogs are included further down on this page, under Links.

This list is fascinating evidence that quality content virally finds its own audience. Congrats to all the winners, and happy reading.



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Monday, May 21, 2007

The RUT Steals the Show

The Bataan Deadline March continues for me, although it's pencils down on Wednesday evening. Thursday morning I leave for about 10 days on the road (return isn't booked -- not my favorite). It's revealing that I'm looking forward to hitting the road so I can get some rest.


Stocks took off higher on Monday, but the tepid volume proved no match for afternoon selling pressure. All of the indexes closed off their highs, and the Dow even - gasp -- closed down for like the first day in 5 years.

While the index wicks look a little disturbing, it's important to note that the fundamental leadership had an outstanding day on Monday. The IBD100 gained 1.5% as 78 of 100 stocks moved higher. Also, an eye-popping 36 stocks printed record highs. The market internals were superb again as well, and a look at the charts shows noticeable improvement. Throw in a decent TOF Ratio, and it's probably still a little early for grave dancing.

As the mainstream press hung on every SPX tick, the more interesting story on Monday was the RUT. Just when we thought small-caps were trés passé, the RUT quietly turned in Monday's best performance and even notched a new, all-time high. The SML showed that the move was for real, as small-caps saw the strongest volume of all of the indexes on Monday. Going forward, it will be interesting to see if the small caps can follow-through. If the broad rally is to continue, it's a necessity.

The volume sag is about the only thing not to like about the Composite tonight. The 6-year high on climbing Money Flow is a positive sign, and ADX is starting to curl upwards.

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In addition to being a great investment tool, QID also offers a front row seat to investor sentiment. Since QID price is determined solely by NDX derivatives, buyers and sellers have zero effect on price in the chart below. Heavy QID volume isn't "exhaustion" or "bottoming" or any of the other supply-and-demand signals seen in traditional securities.

From a sentiment perspective, the volume you see is actually a revealing type of investor "vote". The voting has been ferocious lately, and the bigger question is whether or not it has contrarian value.

In the past two weeks, QID has set 4 of its 7 highest volume days ever. Monday's 32 million shares set a new all-time record, a clear sign that institutional investors are hedging with QID. The real winner: ProShares.

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The indexes look a bit stretched, but the fundamental leadership continues to look strong. While markets change quickly, they usually throw off important warning signs before the Big One. For now, none of the familiar mayday signals are evident just yet, but tomorrow is a new day.

Until then have a great evening.



Sunday, May 20, 2007

XAU:GOLD in Sync with the US Dollar?

The XAU:GOLD ratio is one of the classic buy/sell timing indicators for precious metals. The Gold Ratio is a blunt instrument, but significant ratio lows -- usually below 0.2 -- suggest a new PM buying cycle is near.

The Gold Ratio also has a long history of maintaining an inverse relationship with the US Dollar. A representative sampling of this is the 6-year period from 1995-2001.

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However, in late 2004, something very unusual happened: the Gold Ratio and the US Dollar began moving in parallel. Anything "gold" moving in parallel with a fiat currency is every goldbug's worst nightmare, and unfortunately it's a condition that persists to this day.

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Over the past three years, gold's de-correlation with other asset classes has seriously waned. It's even affected gold's most prized role as an inflation hedge. On numerous occasions (most recently May 11), the stock market tumbled on inflation fears -- but gold fell even harder. On May 11, the XAU was actually the worst performing sector.

Perhaps the most infamous de-correlation snafu in recent memory is gold's massive tumble during the May 2006 stock market correction. While the SPX pulled back 8%, gold fell 26%. The irony is that equities corrected in May 2006 in part because of the effects of hefty inflation on Fed policy. The SPX is now 15% above the May 2006 high, while gold is still 9% below, even though inflation remains stubbornly high and the US Dollar has fallen over 7%!

Some in the financial community contend that this unusual behavior is evidence that the price of gold is being manipulated. As the theory goes, the world's central banks are conspiring to keep the price of gold low to create the appearance of low inflation and provide fiat currency support. Another reason suggested for the XAU's odd behavior is that the miners are so heavily hedged that they can't benefit from gold demand.

Regardless, the only thing more interesting than watching the Gold Ratio parallel the US Dollar is to watch for the market force that will eventually wrench the two apart once more.



Saturday, May 19, 2007

Positive Signs?

I'm still under the gun with work. One project is (finally) done; a second is due Wednesday. Working straight through the weekend.

The market stepped up to the plate on Friday and made key technical improvements. On balance, the NASDAQ looks ready for more gains, and the week before Memorial Day has a tendency for strength.

Market internals were much stronger on Friday, but a look at the charts is a sobering reminder of the wobble that lurks within. That said, the weak internals also have a logical explanation: small-cap selling. The NASDAQ contains a huge number of small- and mid-cap stocks. As a result, this majority can be weak while the (cap-weighted) index hangs in there, and even moves higher. Regardless, no market makes a sustained push without internal health.

Both the IBD100 and the TOF Ratio continue to show no unusual signs of wear. On Friday, the IBD100 outpaced the market with a 1.2% gain as 72 of 100 stocks moved higher. Also, 14 stocks hit new highs, up from Thursday's 9. The TOF Ratio suffered a pair of nasty spikes two weeks ago, but has since calmed down and is in ideal position for another market up move.

The Composite closed at the highs of the day on an uptick in volume. Money Flow refuses to go below 50 even on pullbacks, and Stochastics are headed higher. The curiosity is ADX. Typically, when it slides down to 10, an acceleration in trend is near. However, as late Feb shows, that acceleration could also be to the downside.

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The weekly NASDAQ chart presents one of the best technical arguments for a pop to the upside. For three consecutive weeks, the Composite has printed weekly hammers as buyers scooped up any shares that fell to the floor. The punch line is that now the buyers stepped in at the 10-week line. Higher volume shows the institutions at work, and don't let the fractional loss distract you from noticing the accumulation that actually went on this past week.

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The Banks continue to make good on their improvement. MACD looks lousy, but consolidation is brutal on momentum indicators.

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Another important "lifeblood" chart are the Transports. The TRAN is printing a bullish ascending triangle and notched another new, all-time high this week.

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The 10-year Treasury Yield broke out to a 4-month high on Friday. As most of you know, I've been fascinated by how the normally hyper-accurate bond market has been so consistently wrong about the economy for over a year. The distortion likely has its roots in the huge influx of "dumb" foreign money into Treasuries. Regardless, the bond market continues to come to its senses, slowly but surely.

While rising yields can be a problem for the stock market, all the 10-year is doing is moving towards the (historically low) Fed Funds rate. At 4.8%, the 10-year yield is an eye-popping 9.2% lower than the Fed! In Bond World, that's an unusually large gap.

Is this a problem for equities? The most reliable answers come from the market itself. The Banks had an up week, Utilities hit a new all-time high, both Retail and the Housing Index closed above their 50-day and the yield curve is positive again. Gasoline may be a problem near-term, but 5.25% appears baked into the cake.

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Finally, does QID "voting" have any usefulness as a contrarian indicator? Convinced that the market had nowhere to go but down, Tuesday saw the second highest QID volume ever as buyers dove in headfirst. However, the extreme level of activity may have marked a short-term bottom for the NDX.

Notice as well that Wednesday was the third-heaviest volume day ever, as many investors apparently felt a touch of buyer's remorse.

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The two-week correction appears to be giving way once again to the more predominant IT uptrend. The market needs confirmation, but looking through a wide watch list of stocks continues to show a lot of strength. Like Dow 13,000, the looming SPX record is another one of those sentiment magnets.

That said, recognizing the trend is very different from being careless. For starters, you've got to be very selective with what you're buying. This market is very unforgiving if you're in the wrong spot. Even worse, the market is eventually going to correct and make a lot of investors miserable.

Until then, if you want to consistently outperform the broader market, you've got to follow the ball. Buying and selling on volume remains one of the best short-hand tools at your disposal. Fortunately, this market has stayed very "volume-rational" with individual stocks. I've had excellent success holding positions that droop on low trade, and bailing on those that show distribution. This is a very good sign.

Until Monday, have a great weekend.



Thursday, May 17, 2007

Rotting Internals

I'm still on the chain gang tonight.

On the bright side, Thursday saw a pullback on low volume. The IBD100 slipped the same amount as the NASDAQ, and IBD100 breadth was 50% better than the NDX. The Banks, Cyclicals, Energy, Transports and Tech stocks all continue to look OK, and the TOF Ratio is steady.

However, I'm not a fan of the continuously weakening internals. A big part of it is the rotation out of small-cap stocks. However, without breadth, up volume and new highs, markets rot from the inside and eventually fall apart.

Dr. Brett calls the recent action a stealth correction. His Market Notes for a Thursday looks at it from the TRIN perspective, and he makes the point that the weakness is becoming "less stealthy" all the time. Not my favorite.

Rotting internals also means that your stockpicking skills are more important than ever. There's no tide out there to help raise a leaky boat.

I should have time over the weekend for a more detailed post. Hope everyone's doing well, and until then, have a great evening.



Oversold bull flag? Bearish rounded top? Who knows? but at least it was a low-volume inside day.

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Wednesday, May 16, 2007

Bounce Back - Part One

I am totally crunched on a deadline tonight, so I need to be brief.

Until institutional investors dump the fundamental leadership, any pullback can -- and usually will -- have upside surprises. Wednesday was a perfect example of this, and important clues were visible on Tuesday.

Tuesday was very distracting, with noisy, high-volume selling and awful internals. The market took a big technical hit, yet despite this, there was no selling on the IBD100. This was very odd, and an unexpected show of strength. Also, the TOF Ratio was stable, which meant that option investors kept their cool. This is always better than the alternative.

So -- somewhat unsurprisingly -- the buyers returned on Wednesday, and the market (thankfully) had a solid day from the inside out. Volume was strong, the market internals were excellent and the IBD100 did well.

That said, this market is still on bed rest. It needs follow-through on big volume -- and several days of it -- to correct the recent technical damage. The pullback has been messy, and it's left the indexes with serious internal injuries. Without follow-through, the market will simply print a dangerous, lower high, then roll over for a more serious summertime tumble.

It's important to understand that the charts also suggest that the market can still heal itself, if only for an intermediate push. The Banks were up sharply, as were the Dow Theory Triptych -- the Dow, Transports and Utilities -- and the Tech Ratio continued its climb. Overall, stocks with strong fundamentals are doing fine, and the IBD100 looks in very good shape. In addition to charts, there are contrarian reasons, yield curve reasons, commodity reasons, currency reasons and bond market reasons supporting the market as well.

Also, and perhaps the biggest reason of all, the SPX is now less than 1% away from an all-time high. It's easy to make apples-to-oranges excuses for the (price-weighted) Dow's all-time record highs. However, the (market-cap weighted) SPX is a much tougher index to say, "yeah, but...".

It may not be tomorrow, but the market looks like it eventually is going to move higher.

Until tomorrow, have a great evening.



The Composite is almost oversold, yet it's just 1.2% off a six-year high.

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Tuesday, May 15, 2007

Selling Picks Up

On their website, CNBC summed up Tuesday's action with:

Dow Closes At Record High on Tame Inflation Data.

Well, I guess that's one way to look at it.

Another way to see it is that sellers are finally gaining downside traction on strong volume. The Composite printed its 3rd distribution day in the past 4 sessions, which is more like the May that most investors were expecting. Also, the intraday rhythm has shifted, from morning selloffs that reverse to higher closes, to morning rallies that end in selloffs. Market internals continue to be very weak.

That said, up or down, the market never sends perfect signals. Amid the weakness, an important divergence continues to be the IBD100. It fell 1.1%, a little worse than the RUT's 1% decline. However, breadth -- once again -- was better than the broader market, especially the NDX. 33 stocks on the IBD100 closed higher vs. just 17 on the NDX. Also, 15 stocks on the IBD100 hit new highs.

However, the real kicker with the IBD100 continues to be the pronounced lack of selling pressure. Expecting pure carnage, I was surprised to find that only 15 stocks on the IBD100 printed distribution days on Tuesday. That's one less than on Monday! For whatever reason, institutional investors aren't dumping the fundamental leadership. Unless the IBD100 sees heavy selling, it's unlikely the market will see a repeat of May 2006.

Technicals are deteriorating rapidly, while price hasn't even tested significant support at the 50-day or Fib 62. This means that the odds favor it gets worse before it gets better. However, this is OE, so who knows?

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At the end of April, scduo4fun posted a link to a great chart by Mike Paulenoff at Paulenoff said that when the DIA:IWM ratio cracked 1.64, a tectonic shift towards large cap stocks had been confirmed. That confirmation happened today.

What does this mean? Well, large caps historically lead at the end of bull cycles (a period that can last a long time FYI). Also, when you shop, think big. For example, on Tuesday just 1 in 3 stocks closed higher. However, on the OEX, 50 of 100 stocks closed up. The chart below is saying that, statistically, size now matters.

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QID volume doesn't drive QID price, but functions more like daily voting machine. On Tuesday, QID saw its 2nd highest volume ever! The public has spoken, now let's just hope it hasn't learned to speak contrarian.

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The TOF Ratio -- like the IBD100 -- continues to hold up well. For now, Atlanta isn't burning, but the battle is young.

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If you follow the ball, you follow it wherever it leads you. In case you haven't noticed, it's leading you down right now. Corrections, like rallies, tend to be very unpredictable, especially when they're counter to the primary trend -- like this correction.

Until the IBD100 and TOF Ratio start falling apart (which could be tomorrow!), this market probably has a few upside surprises ahead.

Expect the unexpected, and adjust risk to taste.



The Other 66%

Even though last week Alan Greenspan reiterated his "33% chance" of a US recession, the market itself continues to weigh in that the chances are far less.

Since recession talk began ramping up in summer 2006, the market has consistently been sending a very different message. For example, since the July low, the NASDAQ is now up an impressive 27%. Below are two charts that reinforce the message of the markets, and place recession odds far lower than even 33%.

It's only an intraday print, but the peskier 3-month/10-year Yield Curve as now back at even, and Cyclicals don't rally in the face of bona fide recession risk.



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Monday, May 14, 2007

A Grumpy Market

Even on a down day, Monday showed how difficult it's been for sellers to gain control of this market.

Composite volume picked up 12%, technically making this the second distribution day in three days. However, the market closed well off its lows and trade was below average. Not exactly decisive selling.

Market internals were horrendous yet again, and a look at the charts shows that the rally is weakening from the inside out. Not my favorite.

However, both the IBD100 and the TOF Ratio are showing no signs of imminent disaster. The IBD100 slipped in line at 0.5%, while breadth was actually better than the broader market. 40 of 100 stocks on the IBD100 moved higher, while just 27 stocks on the NDX posted gains. Also, the selling was pretty light, as just 16 stocks printed distribution days. Since IBD100 volume was so light on Friday, this makes today's sell stat particularly unimpressive.

Bottom line, the market action suggests it's not about the technicals -- it's about this week's economic data: Tuesday's CPI and manufacturing numbers, then the housing and employment reports later in the week. OE is another consideration, but OE volatility has been virtually non-existsent for a while. Charles Kirk quotes Jason Goepfert that 9 of the past 10 OE's have closed positively for the week (OE Friday closed higher than the preceding Friday).

The chart below looks weak, but not one stock I own saw heavy selling on Monday. As I mentioned on Saturday, the market is not in the mood for a strong CPI report. Should inflation come in a bit hot, expect fireworks to the downside.

I'm in the middle of deadline hell, so posting could be a bit erratic this week.

Until then, have a great evening.



Because of the calculation method, stochastics will likely fall to near 20 on Tuesday. However, all the sellers have to show for growing oversold is a 1.3% slide. The Composite has a rounded top, but for now it's only consolidation. The uptrend remains in tact, though by 8:31am tomorrow, it may be a different story.

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Sunday, May 13, 2007

Energy Selects

I generally avoid posting specific stock ideas, but a look through the energy space this weekend shows a number of highly-rated companies poised for moves higher. Regardless of the price of crude, energy stocks are on the move.

Here's a link to Ten Energy Selects that are in decent technical setups. Everyone has their favorites, so if yours isn't here it means nothing. In addition to good setups, each of these sports excellent fundamentals.

They're arranged in groups:

Coal -- ACI, CNX
Solar -- SPWR
Equipment - CAM, NOV
Offshore -- RIG, OII
Drillers -- DNR, UPL, NE