Wednesday, May 09, 2007

FOMC Teflon

Quien es mas macho? El toro es mas macho!

On yet another day that seemed perfectly prepped for a selloff, stocks shook off the FOMC volatility to close at new highs. Amazingly, the Dow, SPX, NASDAQ, NDX, SML, MID and WLSH all set records on increasing volume. Apparently, the Fed's hawkish yada-yada-yada was already baked into the cake.

After an unchanged close on Tuesday, the IBD100 solidly beat the broader market Wednesday with a 1.2% gain as 76 of 100 stocks closed higher. While an impressive 24 stocks hit record highs, another 3 dozen IBD100 stocks sit just below new highs. This is a strong sign indicating that this rally has juice.

Market internals are corroborating the IBD100. While breadth is lagging, Up Volume and New Highs support the idea that the market has the structural integrity to keep moving higher.

Strong bull rallies don't provide comfortable entry points. Bears hoping to clean up short positions, and Bulls hoping for a decent entry point both appear to have been foiled for the um-teenth time since the March bottom (in truth, it's a pattern of discomfort that began last summer).

The best thing about the NASDAQ chart below -- besides the 6 1/2-year closing high, outside candle, 12% volume increase and OBV climb -- is that Money Flow curled upwards on Wednesday. This is an important development, and helps make the Composite a great-looking chart tonight.

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Option investors -- now convinced that the market has nowhere to go but up -- went on quite a call-buying spree Wednesday morning. Thankfully, by the close they had (somewhat) returned to their senses. It's disquieting to feel relief that the TOF Ratio closed "down" at its upper boundary, but such was the nature of Wednesday's option action.

Blarg was correct that the index call action was far more severe than for equity calls. To show the effects of this, below are two versions of the TOF Ratio. The first is the familiar "official" one that uses the combined index and equity option data ($CPC). The second uses just equity options ($CPCE). Many aficionados prefer the equity version in this context, as it's allegedly the "dumb money". Consistent with the investor sentiment data, the dumb guys don't seem as convinced as the pros.

It's tough to know what to make of this high TOF Ratio level. The VIX has had similar issues lately, and has been "too high" for the current stock market strength.

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Even without expectations for a rate cut, the Banks continued their recovery on Wednesday. Technically, the Banks appear to be organizing an inverted H&S. In many ways, a healing BKX is one of the most promising charts for this market.

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Another promising chart for the broader market is the SOX. It continues to follow-through on its breakout, and has now closed higher 11 of the past 16 sessions.

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Finally, it's worth pointing out that investor sentiment, whether measured by AAII,, Investors Intelligence or the Ticker Sense blogger poll, unanimously tipped more bearish this week. The higher stocks climb, the more cautious investors become. Of course, this is the ideal reaction to higher stock prices. The last thing this market needs is a bunch of bulls.

As a change of pace, below is the Investors Intelligence Bull/Bear Ratio. Notice how much lower the Ratio is now than it was in January, even though stocks are 7% higher. You couldn't ask for a better contrarian recipe for a continued rally.

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Last night, the market provided sellers an excellent opportunity to push this market lower. Technically, the indexes were wobbly, and fundamentally, a laundry list of weaknesses exists to capitalize on. 24 hours later, the laundry list remains intact but the technical structure of the market has shifted back to the bull's favor.

The are no guarantees of course, but the odds have improved for stocks to eventually move higher from here.

Until then, have a great evening.



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