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.



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