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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