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 mptrader.com. 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.



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