Saturday, June 30, 2007

dk Report Considers Calling it Quits

I've recently received a new business proposal that I'm giving serious consideration. Should I accept, it's unlikely that I would have time to continue The dkReport. No decision has been made, but I thought I'd run it by everyone here first.

A new, three-star US hotel is in the planning stages (location undisclosed), and I've been asked to sit as chairman and run the operation.

Hotel management would be a new pursuit for me, although I'm an experienced entrepreneur with over 25 years building and running my own service businesses. Also, I worked in the restaurant industry for 11 years growing up, and know first-hand the joys and pains of the hospitality industry.

The good news came in the following letter, which I thought I'd share with you. It's obviously a foreign company, and the odd syntax and grammar has an old-world charm that I find endearing.


Dear Mr. Kneupper

I am Mr. Tony Adamson, I wants to buy a three star hotel building in your country within the range of $28 million US DOLLARS.

I solicit for your cooperation to an experienced Person like you, to assist set up develop this project in your country and assume responsibility of ownership as a chairman and operational partner in this Establishment, for your assistance you shall own 30% of the investment as the chairman & operational partner.

Your immediate reply will be highly appreciated and I shall give you more information on this project.

Please contact me at my private E-mail:

Mr. Tony Adamson


Cool huh? There is no such thing as luck -- it's just opportunity meeting preparation, and I've been prepared for something like this for a long time.

I'm writing him now, and I'll let you know how things work out.



Friday, June 29, 2007

Threat to the iPhone Discovered!

The release of Pixar's Ratatouille is one of the few things with any hope of stealing the iPhone's thunder this weekend.

Over the next three days, roughly the same number of Americans will see Ratatouille as will buy the iPhone, placing Steve Jobs at ground zero of American popular culture. It will be over soon enough, but for now, it's good to be the Steve.

Friday morning, Fake Steve at The Secret Diary of Steve Jobs posted the memorable, 29 June 2007: The Day the World Changed. Later updates revealed that Washington politicians even came out today with iPhone position statements:

Edwards: "iPhone will eradicate poverty"; Clinton: "iPhone will transform health care"; Guliani: "If you don't buy an iPhone, then the terrorists have won"; Gore: "by combining 3 devices, the iPhone reduces greenhouse gas emissions"; Brownback: "Discovery of iPhone is as profound as evolution, and I don't even believe in evolution"; Cheney: "Fuck the iPhone".

Muckdog at the The Learning Curve showed his considerable mettle as an economist on Friday. He pointed out that the iPhone could prove disinflationary to the US economy, as consumers reduce discretionary spending to support the rapid iPhone upgrade path. Furthermore, as money chases the latest iPhone releases, the product could actually act like a tax hike on consumers.


All joking aside, this type of product phenomenon also generates enormous criticism. However, don't let either the overblown hype -- or the vicious backlash -- distract you from understanding the true significance of this product. In recent articles, Barry Ritholtz at The Big Picture and Paul Kedrosky at The Wall Street Journal come closest to identifying its biggest significance. As a creative professional, I can tell you first-hand that their observations are dead-on.

Here's what all companies can learn from the iPhone:

1. Every da Vinci-caliber idea springs from the imagination of a single person. Corporations rely on committees to solve problems. However, groups are genetically incapable of this level of innovation. It's counterintuitive and cuts against our democratic instincts, but companies should empower their best individuals (not just committees) to find solutions to their biggest problems.

2. Consumer interfaces suck. 100+ million mobile phones have been developed and sold, but they're as clumsy and difficult to use as ever. So are remotes, software, dashboards, kiosks and countless other interfaces. This was an accident waiting to happen, and other interfaces are vulnerable to change as well. Think about the Wii. I assure you, Sony does every day.

3. Ignore the consumer experience at your own peril. US cellphone carriers -- especially the uber-crappy AT&T -- are about to learn this the hard way. The US auto industry and broadcast media already have, and the airlines are at great risk of an uprising. The IRS got nicer, and collections improved. Imagine that.

4. Before you buy back stock, expand your R&D.

5. See #2.


At a lunch recently, I sat next to a very high-level executive at Sprint. I asked him why -- in this day and age -- we still have dropped cellphone calls. He said the answer was simple: consumers don't care. Research shows that all people really care about is a cheap phone and cheap monthly rates. They don't care about the service.

Oh really?

This is an accident waiting to happen, and what if something came along to change the status quo?



Thanks, iMuckdog

I want to publicly thank iMuckdog (pictured above) for standing in line for my iPhone today.

Muckdog, I still think $10/hr is a little steep, but I know I had to match your pay from Kinko's (hope that flask of Ketel helps smooth out the bumps).

I know you're getting right back in line tomorrow to buy your own, so this really means a lot. There are friends, and then there's you:

the iYou.

Just give me a call when you get close.




Thursday, June 28, 2007

It's So Easy...

On Thursday, Ben Bernanke (not pictured) left rates unchanged for the ninth time in 12 months.

Being the Fed chair is so easy, a c...

Final Q1 GDP numbers offered no cause for alarm Thursday morning, and trading began with stocks drifting higher on light trade. But as expected, chop and slop hit after the FOMC statement. Investors got out their Roget's and weighed inflation adjectives, trying to decide if "persisted" is worse than "elevated" (apparently it is).

However, volume dropped across the board, indicating that investors aren't that worried. Positive market internals actually tipped the so-so action in the bull's favor. It's worth noting that market internals (see charts) are improving after the recent spate of stock weakness.

Leading stocks added to Thursday's bullish bias. The IBD100 gained 0.3% as 51 of 100 stocks moved up, and new highs increased from 5 yesterday, to 17 today. Despite the drop in volume, 18 stocks saw accumulation vs. just 6 being sold. Market internals and the fundamental leadership point to a market prepped to move higher.

Today's NASDAQ candle pattern is a bearish setup, but it tends to have low/moderate reliability. Today's lame volume and the candle location inside the base weaken the gravestone case.

None of the major indexes look great, but for the moment they've stopped getting any worse either. Despite tomorrow's trifecta of quarter-end, month-end and week-end, it's hard to expect anything other than more choppy action -- but I'm willing to be surprised.

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You've got to draw the line somewhere, so I've decided to go with the cheaper model tomorrow.

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It's worth noting that, despite the wild VIX action over the past three weeks, the Put/Call Ratio remained well-behaved. In fact, the TOF Ratio had a positive crossover today, just six days after confirming a Sell. This isn't enough to wave the green flag, but it's a promising development.

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Fed funds have now been at 5.25% for the same length of time that they were at 1%. The rate environment has been stable for many years, and none of the current economic woes -- except maybe inflation itself -- can be tied to FOMC policy. Higher unemployment -- not the housing debacle -- is the one thing with the mojo to budge the Fed lower.

Core PCE aside, Wall Street is now poised to shift its focus to the one thing that really matters: earnings. Epic short interest has a lot riding on bad news, and RIMM won't make their job any easier tomorrow.

Until then, have a great evening.



Wednesday, June 27, 2007

Bulls (Finally) Bounce Back

The bears are still in charge, but they sure are doing it the hard way.

The NASDAQ gapped down to its 50-day on weak manufacturing data, then reversed course and put in its best day in over 9 months. The resulting outside day reclaimed 2600 and erased nearly three days of technical damage in just 6 hours. Volatility works to the upside as well.

The problem is that volume increased less than 1%. Although the mainstream press called Wednesday's action "window-dressing", the mediocre trade suggests that startled shorts fueled a big chunk of the rally. In truth, countless portfolio managers enjoyed a lucky technical bounce.

Because of this, the NASDAQ remains under Monday's Amber Alert. It stays that way until a follow-through day on big volume takes out the old high of 2631. Of course, that's just 1% away, and on the NDX, it's even less than that.

The recent strength in leading stocks is the most credible evidence that further highs are likely. The IBD100 lagged early on Wednesday, but came on strong in the final two hours to match the Composite's 1.2% gain. The critical tell was that the IBD100 saw genuine buying on Wednesday and not just panicked short-covering. 30 IBD100 stocks printed accumulation days, vs. just 17 on the OEX and 16 on the NDX.

Considering the litany of woes facing the financial markets, the major stock indexes continue to hold their own. The indexes are all back above their 50-day, and the NASDAQ's trampoline move was textbook. There's a lot of work ahead before the market looks healthy again, but the bears inexplicably squandered another easy kill.

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In the "Erasing-Technical-Damage-in-Just-Six-Hours" Department, option volatility clearly wins the prize. I've made caffeine and methamphetamine jokes about the VIX, but after 16 straight days of intraday price swings ranging from 7% to 18%(!), it's not so funny any more. Instead, it has grown disturbing.

What it's saying is that there's tremendous disagreement among option investors about near-term stock market risk. The troubling part is that the intensity of these differences isn't fully visible in the stock market itself. Based on when this recent volatility began, it would seem that "bailing out" a hedge fund is viewed by the option community as a much nastier process than parties are letting on.

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In Wednesday's durable goods report, the data showed technology as one of the few areas of business spending that's growing. This is consistent with what the stock market has been saying as well.

The chart below compares the Tech Index with the SPX. As you can see, for the past four weeks tech stocks have accelerated rapidly to just below a 15-month high vs. the blue chips. Regardless of how you choose to measure it, technology is steadily resuming a leadership role. At the very least, build a tech watchlist.

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Everything bounced today, but stocks with big surges in volume are worth particular consideration. These are stocks under accumulation, and they tend to be more disease-resistant. This is an important quality in malarial times like these.

The big news tomorrow is the FOMC policy statement. There's lots of chatter about the Fed officially adopting an inflation metric that includes food and energy. This change seems unlikely, but you never know. Given the current volatility, a change wouldn't be viewed as "market friendly" near-term, regardless if it help the Fed do their job better or not.

Expect continued chop, and maybe even more buying. A 2:15pm fireworks show is a real possibility, and as long as you follow the volume, you should do OK.

I'm out most of the day tomorrow, but will check in later in the evening.

Until then, happy trading.



Tuesday, June 26, 2007

A Puzzling Disconnect

Reflecting on the market, I'm reminded of the words of Robot B-9:

"Does not compute".

On a day that no index closed off more than 0.5%, the VIX shot up 13%! Also, Tuesday marked the 3rd time in 14 sessions that the VIX closed above its upper Bollinger band. However, these aren't even the stats that fail to compute.

In the past five sessions, the SPX has shed 2.6% while the VIX has skyrocketed an eye-popping 48%!

Option investors are clearly spooked, but the stock market doesn't seem to share this sense of dread. In fact, it's hard to tell what institutional investors are feeling.

For the second straight day, neither bulls nor bears established an advantage, and on Tuesday the NASDAQ closed off just 0.1%. Despite mortgage-backed hand wringing and congressional saber-rattling, sellers were unable to push the NASDAQ even 0.7% lower to the 50-day. While option volatility yapped like a chihuahua, NASDAQ volume fell 1%.

In a continuing theme, leading stocks continue to show few signs of wear. The IBD100 slipped in-line at 0.5%, though 22 stocks did print distribution days. This total is up from 16 on Monday, but it's hardly unusual. A look through all 100 stocks tonight reveals an IBD100 with a distinctly bullish bias.

Without a doubt, the broader market is very wobbly with abundant downside risks. However, it's apparently going to take more than subprime contagion, weak housing, soaring volatility, foreign selloffs, falling consumer sentiment, and 5% Treasury yields to convince investors that it's finally time to start selling with gusto. Obviously, investors want some really bad news.

After seven sessions of weakness, the bears are left with a NASDAQ that's still above its 50-day, but that's now oversold. In fact, the Composite hasn't been this oversold since the China meltdown in March. Furthermore, it's oversold in an uptrend, which wasn't the case in March.

This is a great situation for the bulls, but it's meaningless unless buyers show up to press the advantage. For whatever reason, that hasn't been the case for a while. The chart below is one the bears can destroy in a single afternoon.

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After the Shanghai surprise in late February, the VIX popped into a new gear and hasn't downshifted since. It's important to realize that as the VIX soars to levels near the March highs, the NASDAQ is over 300 points higher since then! Equities have stomached this new rise in volatility with great conviction.

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If the market was headed for real trouble, systemic "flight to quality" rotations would be visible to the naked eye. Since the first of June, the NASDAQ is down 1.2%, the SPX is off 2.5%, but Consumer Staples are off 3.5%. Considering that the 10-year bond is down 4.3% as well, there are few signs of a market hunkering down for bad weather.

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Another interesting development is the precious metals' continued de-correlation with the financial markets. I've written about this before, but even though inflation risks remain high and mortgage unknowns abound, gold and silver aren't acting as a safe haven. Reasons for this are discussed in the link above, but for now, no asset class is taking the current market woes harder than gold and silver. Silver had a very bad day today and slipped below its 200-day. Surprisingly, the XAU leads all asset classes lower in June with a 5% slide.

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This is a near-impossible market to call short-term. Even if you get it right, the volatility prevents you from staying that way for very long. The bears are in control, and one slice of bad news could push the market past the point of no return.

On the other hand, lots of things still "don't compute". Volatility aside, it will be interesting to discover why the fundamental leadership has stayed so strong during these trying times.

Robot B-9 had another, even more famous phrase. Until the market finishes strong each day on huge volume, I'll continue to heed the unforgettable, "Danger! Danger! Will Robinson."

Until tomorrow, have a great evening.



VIX and VXN Ratios

In an ongoing quest to see if the VIX and VXN can produce Buy and Sell signals for stocks, I applied TOF Ratio settings to ratios of VIX:SPX and VXN:COMPQ.

[The TOF Ratio is a Buy/Sell indicator that divides the NASDAQ by the CPC, using EMA crossovers to trigger the signals. This indicator was developed by the legendary board poster, The Old Fool. I maintain a live version of it here -- fifth chart down.]

Though not perfect, smoothing the VIX and VXN Ratios with EMA's produces illuminating results.

In terms of indicator clarity, the VIX Ratio is the lesser of the two. In April, the synchronized rise in both the SPX and VIX logically produced EMA's that stayed flat for 7 weeks(!). Once the two became more "rational" and broke apart, the EMA's crossed and gave a Sell signal (red arrow). Note that the Sell is still on.

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The VXN Ratio has behaved more reliably throughout the recent volatility ordeal. It's worth pointing out that, after a clean Buy signal in early April (green arrow), the signal is still on. This is consistent with a NASDAQ that is outperforming the financially-troubled SPX so far in 2007.

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Bill Luby at VIX and More has been exploring the SPX:VIX for some time and has written a series of excellent posts on the subject. In response to our ongoing discussions, here's a link to his latest post on usefulness of the VIX Ratio as a timing tool. The post summarizes the recent history of his inquiry, as well as takes it in far more detailed directions. It's a great primer for first-timers to the subject. Thanks for the great work, Bill.



[The graphic at the beginning of this post refers to a series of audio shows collected by Vic. It's an interesting collection, and "Vic's audio shows" are available as podcasts or mp3 downloads.]

Monday, June 25, 2007

Amber Alert

The devil's beating his wife.

Growing up in Texas, this expression described the paradox of a rainshower while the sun was shining. Rain is falling in broad daylight on Wall Street as well, as neither bears nor bulls seem capable of delivering the final death blow.

The problem for the bears is that the selling continues to lack intensity. The problem for the bulls is that price levels are falling like flies.

Stocks gave back solid gains on Monday and the SPX, WLSH, MID and RUT all closed below their 50-day. However, volume was unspectacular. The NASDAQ closed at its lower trendline, but trade was just average, and its 50-day remains untested.

Adding to the mixed picture, leading stocks continue see light selling pressure. The IBD100 slid 0.8%, but just 12 stocks printed distribution days. As bizarre as it sounds to say, this is not normal market behavior at important cycle tops.

That said, this isn't normal behavior at durable market bottoms either. Stocks appear to be headed lower, and the recent market moves have given observant investors plenty of time to adjust risk. The bears are in control, but for them to maintain it, they need serious waves of downside selling pressure.

The NASDAQ gets an Amber Alert tonight as it tests a shaky trendline on deteriorating technical indicators. A date with the 50-day appears to be a given, and a confirmed failure below triggers an extended forecast of foul weather.

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In a revealing example of how stocks continue to behave like The Undead, consider the XLF on Monday. As subprime contagion fears swelled, XLF bounced at its 200-day and closed down just 0.8% -- less than the RUT. The Banks were off just 0.4%. XLF is a terrible chart, but buyers continue to step in and rescue it from the jaws of death.

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While the SOX looked awful and gave up last week's breakout, the Tech Index slipped just 0.3%, and Transports and Drugs actually closed slightly higher. More examples of The Undead.

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Could the VIX have double-topped? In truth, volatility is so meth'd out that arbitrary limits on the VIX are meaningless at this point. Expect wide price swings and choppy trading to continue

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While the broader market seems poised for more declines, institutional investors haven't abandoned stocks with the very best fundamentals. This is an unusual sunny spot in an otherwise rainy equity market. It suggests that for now, we're witnessing elaborate profit-taking.

But that could change very quickly.

Until tomorrow, have a great evening.



Saturday, June 23, 2007

Looking Ahead

A thousand words on the Blackstone IPO are pictured at left. No further comment.


The pendulum swung the other way on Friday, as the bulls proved no better at follow-through than the bears. Not only was the 60-minute divergence test a dud, the NASDAQ slid 1% on a whopping 35% surge in volume.

In truth, over 1 billion NASDAQ shares traded at Friday's close as part of the Russell rebalance (Global, 1000, 2000, 3000 and Microcap). The rebalance had little effect on Friday's session other than the settlement spike, and Investor's Business Daily isn't even counting it as a distribution day.

The exclusion is fair because NASDAQ trade was tracking 15% lower -- about 1.7 billion shares -- when the closing spike hit. The 1% loss and volume surge were real, but the selling intensity in this back-and-forth market continues to be conspicuously absent.

As the indexes look poised for disaster, leading stocks continue to show few signs of stress. For weeks, the IBD100 has outran the market on up days, and tracked in-line on down days. While the NASDAQ fell 1.4% this week, the IBD100 added 0.1% and is up 19.3% YTD. This bullish divergence will eventually change, but so far, there's no sign of it. In fact, it continued on Friday.

The IBD100 fell 0.9% -- less than the NASDAQ, SPX or Dow -- and 10 stocks even hit record highs. Breadth was terrible market-wide, but the IBD100 did OK. Just one Dow stock closed higher on Friday, and only 1-in-10 advanced on the SPX. However, on the IBD100, 1-in-5 moved up. The biggest problem was that distribution spread to 26 IBD100 stocks. While this is higher than normal, the average decline for those stocks was just 2%.


What does all of this mean for stocks going forward?

Everyone wants simple answers, but unlike May 2006, it's a mixed picture. Near-term, the market is clearly weak. However, key strengths are in place that could limit downside risk. Longer-term looks even better, as there are no signs that the global expansion is waning.

Below are 10 observations to help frame the mixed outlook, and help determine what the uncertainty means for your investment approach and time horizon.

1. The market is still split, but the tables have reversed. The NASDAQ now leads the market with a 7.2% gain YTD. This ties the Dow, but it's ahead of the SPX's 5.9% gain. The NASDAQ chart below is weak on many technical levels. However, it's still above key support, including the 50-day and 2530. From a TA perspective, it remains in an uptrend.

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2. By contrast, the SPX has acute malignancies and is on the verge of rolling over. While the double-top on the daily has captured everyone's imagination, the weekly SPX shows the double-top playing second fiddle to a bearish expanding wedge. The 40-week is about 4% below. If the SPX spends more than a few weeks consolidating below the red line, it's a whole new ballgame for the US stock market.

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3. A key reason the SPX is failing is that the Financials float in a perfect storm of hedge fund woes, higher rates, housing uncertainties and (now) zealous politicians. It's difficult for the market to make headway without the Financials, although it's worth noting that the XLF is still above its 40-week. Expect a fight at support, with 34 as the point of no return.

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4. Option investors have gradually shifted their bias to puts. This is unfortunate for the TOF Ratio, which on Friday printed a second, negative EMA crossover. While this crossover was weak and undramatic, it technically triggers a Sell. This rarely ends well for stocks.

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5. Speaking of options, the VIX continues to suggest that choppy markets may be around for a while longer. Friday marked the 13th consecutive day that the VIX had an intraday range of greater than 7%. This VIX hyperactivity began with the infamous bond selloff. The fact that it's still going strong even though bonds have stabilized is an indication that hedge fund concerns still weigh heavily on the minds of option investors.

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6. The mainstream press is quick to turn oil into a stock villain on a daily basis, but the market says that -- at best -- it's a wild card. Evidence exists that the market has "gotten used" to higher oil (other global markets sure have). On the chart below, oil surges in 2005 and 2006 pushed the NASDAQ lower. However, by Oct 2006, this inverse effect had faded. Now, crude is back to Aug 2005 levels of $70, while the NASDAQ is 19% higher, and the Transports are 33% higher. There's a limit of course, but $70+ crude may not be the stock guillotine it once was.

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7. Treasury yields are another bogeyman of dubious repute. Utilities, REIT's, Banks and other rate-sensitive groups are reeling from the shock of a 65-bp move in long yields in just 5 weeks. This clearly couldn't have come at a worse time for the struggling housing market. But the rest of the market -- and the world -- hasn't lost perspective that rates are still very accommodative. For the record, 10-year Treasury yields usually live above the Fed funds rate (green line), so expect yields to keep moving higher.

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8. If the US stock market was really poised at the gates of Armageddon, Cyclicals would look very different than the chart does below.

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9. Technology stocks are another key cyclical group showing steady strength. The Tech Index slipped half as much as the NASDAQ did this week, and has weathered the recent volatility very well. For more info on the outlook for tech stocks, see Time for Tech?.

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10. Finally, on Thursday the guys at Bespoke noted that NYSE Short Interest hit another record high in June. Short interest rose 6% in the past four weeks, and has now swelled an eye-popping 30%! over just the past four months. The shorts obviously have big plans for the SPX.

For more information, 24/7 Wall St. highlights short interest moves on individual sectors and names. It's interesting stuff, and even includes short selling info on Warren Buffet's holdings (+44% jumps in both BUD and WFC). The short sellers are counting on weak Q2 earnings. If they come in OK, expect a fresh squeeze to ensue.

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courtesy of Bespoke

The short-term risks for stocks are elevated, and those risks can be catastrophic if you're in the wrong sectors. Meanwhile, the fundamental leadership has been sending a steady message in 2007 that the market isn't on the brink of The Big One.

Maybe not Monday, or next week, or even in the weeks after that, but the market itself is suggesting that stocks are eventually headed higher.

Until Monday, have a great weekend.



Thursday, June 21, 2007

Complex Oscillations

Although pendulum motion appears simple at first glance, there's actually a lot going on behind the scenes.

Stocks marked the 2007 summer solstice by swinging from Wednesday's slide to a higher close on Thursday. This type of volatility is confusing to investors and tortures technical indicators. However, a closer look at Thursday's action shows that the IT bullish tone persists.

As the NASDAQ traveled 32 points intraday, volume ticked 2% higher, breadth was positive and 3 of every 4 shares traded was a buy. Institutional investors were accumulating shares, and price closed near the highs of the day.

Leading stocks confirm this. The IBD100 rallied 1.3%, twice the NASDAQ and SPX gains and three times the Dow's move. Also, IBD100 breadth was excellent as 78 of 100 stocks moved higher. After a selloff, accumulation in the market leadership is an important tell, and on Thursday, the IBD100 saw 30 stocks move up on higher volume. This is a very solid number, especially in a volatile environment.

For over two months, the bears have been absolutely terrible at follow-through. The chart below shows five tall, red candles during the past nine weeks answered each time by a positive reversal to a higher high. Despite repeated chances, follow-through selling has been nonexistent each time.

As a result, the IT uptrend remains intact, and on Thursday the NASDAQ closed 0.6% below a new, 6-year high. If this high is taken out, that would mark the 5th red candle in nine weeks negated by a higher high.

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Short-period charts are notoriously fickle, but an interesting positive divergence has materialized on the 60-minute chart. MACD (3, 7, 4) has a reliable history of identifying short-term price divergences -- up and down. The signals are infrequent -- and occasionally duds -- but the current one is a clean, two-day spread which points to higher prices ahead. It will be interesting to see whether or not MACD (3, 7, 4) produces a dud tomorrow.

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By last Friday, the widespread sentiment that stocks were reacting to rising yields was no longer fully supported by market behavior. Today, the 10-year Treasury yield gapped and ran with no negative effect on equity prices. When yields are less than 6% and the market is healthy, yields and stocks generally move in rough parallel.

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For the past 4 weeks, the NASDAQ has been outperforming the blue chips, and tech stocks surged again today. While the Dow added 0.4%, the NASDAQ gained 0.7%, the NDX rallied 1% and the Tech Index tacked on 1.2%. In fact, the DJUSTC came 4/100 of a point from recovering completely from Wednesday's selloff and printing a new, 6-year high.

Leading the way for technology were the beleaguered Semiconductors. The SOX gets very little respect, even though today it added 3% to close at a new, 13-month high. There is evidence of an emerging sea change in technology stocks that is receiving almost no mainstream media attention whatsoever. The iPhone novelty has everyone distracted, and the bigger tech picture is going largely unnoticed.

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Finally, the TOF Ratio is walking a tightrope, as the 21-day and 50-day stay positive by just a few points. Call buying tomorrow would be a very helpful development.

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Pendulum or not, don't let the back-and-forth hypnotize you into not following the ball. As much caution and leeway as the bears deserve, they continue to disappoint with their puzzling lack of downside follow-through.

Despite the eroded technical indicators, leading stocks and the broader market both suggest that higher stock prices lay ahead.

Until tomorrow, have a great evening.



Time for Tech? UPDATE

[This post is a follow-up to one I made nine weeks ago, Is It Time to Buy Tech? -- dk]

Still haunted by the epic dotcom crash of 2000, traumatized investors tend to have a near-Pavlovian response to the thought of being overweight in technology stocks.

While this is understandable, the avoidance may soon include an expensive opportunity cost. Tech stocks aren't voodoo -- they're cyclical like everything else -- and there are important signs that a new, cyclical tech Buy signal is in the process of confirming.

Today, the Tech Ratio broke above 10-month resistance to hit a new, 18-month high. This is an important development, and is an extension of a rally off the cycle low in July 2006.

The Tech Ratio is a metric of my own creation that uses the Dow Jones US Technology Index ($DJUSTC) and the NASDAQ. The DJUSTC contains 212 component stocks pulled from all tech sectors and across all market-caps. Because of this breadth, I prefer it to other popular numerators, such as the NDX (70 large-cap-only techs), IXCO (an scduo4fun favorite) and XCI (a Dr. Brett favorite). It's worth noting that the NDX, IXCO and XCI are all giving similar confirmations.

The Tech Ratio appears to have put in a 7-year cycle low this past July. This low was confirmed with a higher low in Apr, and today's 10-month resistance breakout.

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The 7-year Tech Ratio chart below shows that while the broader stock market hit bottom in 2002, tech languished far behind for the next 5 years, further burnishing its negative reputation. After bottoming in July 2006, the Ratio is now making a convincing case for a 3-year, inverted H&S. A break above 18-month resistance at 0.238 (dotted line) triggers the cycle Buy signal.

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The Tech Ratio confirms that technology is slowly accelerating past the broader market. It's impossible to know exactly when the cycle Buy signal will occur, but it's logical to assume that it will have something to do with strong earnings.

The evidence says that after a 7-year drought, now is a great time to begin a technology shopping list.



Wednesday, June 20, 2007

Taking On Water


Stocks took a plunge Wednesday on increased volume, and the NASDAQ notched its ninth distribution day in seven weeks.

Oddly enough, price has held up remarkably well (the NASDAQ is actually up 2.8% since the first sell day). However, it's only a matter of time before the Composite will no longer be able to drive away from a selloff like this under its own power.

A gap up to a new 6-year high, that then reverses into an outside engulfing candle deserves extreme caution. It's the kind of formation that can quickly gain further downside momentum, especially given the weak technical indicators.

However, it's worth noting that the selling on Wednesday had that strange lack of intensity again, especially on the NASDAQ. A look at the hourly chart shows that two-thirds of the price tumble occurred in the final hour of trading, while volume accelerated just 4%. On the NDX, volume actually fell 4%. Big tech names such as AAPL, AMZN, DELL, GOOG, INTC and many others all slipped on lower trade Wednesday.

What does this mean? Hard to say, but leading stocks also held up surprisingly well. The IBD100 slid in-line at 1.6% (the RUT fell 1.4%), while 20 stocks hit record highs. Like the broader market, there was a noticeable lack of selling. In fact, just 17 stocks on the IBD100 printed distribution days. It was such a low number that I cross-checked both the NDX (26 distribution days) and the OEX (24 distribution days). These aren't the totals of broad institutional dumping.

But the selling profile of a market can change quickly. Selloffs have a time-honored history of starting slowly, then gaining speed. Even though the NASDAQ has closed the gap and remains above its 13-day, this is not a market to keep on a long leash. The technical indicators are all sobering reminders of downside risk.

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For many weeks, the blue chips have been fairing worse than the NASDAQ, and this pattern continued on Wednesday. The troubling thing about the SPX -- besides a MACD from hell -- is that ever since March, any time the SPX sold off, it rallied to a higher high (green arrows). Unfortunately, this pattern failed on Wednesday for the first time in fourteen weeks (red arrow). Double top?

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There was a lot of chatter on Wednesday about bond yields driving the equity weakness. However, the market itself shows a dubious relationship at best. As the market started selling off, yields actually fell, and the 10-year printed a weak, inside day. The Financials took a big hit, but a more likely culprit for this wasn't Treasuries. It was sympathy pains for the demise of the two BSC mortgage-based hedge funds.

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Option volatility continues its triple-Venti jitters. Wednesday marked the 12th straight session that the VIX has seen wide intraday price swings, almost all greater than 10%. While the SPX fell 1.4%, the VIX leaped 14%!

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Speaking of options, the TOF Ratio is poised ominously above its second negative crossover in three weeks. It's very rare that the market does well when the 21-day can't stay above the 50-day. The last time this crossover pattern occurred, the Feb 27 selloff happened just 9 sessions later.

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Finally, the blogger world has seen a strange cluster of negative coincidences this past week, made even more odd given today's selloff (woooooo....) In a bizarre, geeky twist on the Sports Illustrated cover jinx, 24/7 Wall St. published their 25 Best Financial Blogs on Sunday, only to see 5 excellent blogs from their list -- plus one other -- experience "developments" this week:

The chronically ursine Ticker Sense Blogger Poll printed its highest level of bullish sentiment ever! (contrarian bearish?), Yasar Anwar announced a "Permanent Shutdown", Jim Kingsland announced an indefinite summer hiatus, The Kirk Report had a surprise shut down for an unexpected server move, Dr. Brett disappeared, only to turn up hospitalized with acute appendicitis (get well, Dr. Brett!), and finally the non-24/7 Trader-X bids "Goodbye, Farewell, Amen".

Anyone else have something to announce? Sheesh. :)

Once again, the bears are in the perfect position to cue the fat lady and bring this baby home. All it takes is follow-through.

Until tomorrow, have a great evening.