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.

Image Hosted by

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.

Image Hosted by

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

Image Hosted by

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

Image Hosted by

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.

Image Hosted by

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.

Image Hosted by

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.



No comments: