Wednesday, June 13, 2007

Fashion Update

Beige is the new black.

Five weeks of runaway Treasury yields have brought the equity markets to the brink of disaster. In fact, higher yields have done what Chinese bubble fears and $3+ gasoline could not. However on Wednesday, ho-hum inflation data from the Fed's Beige Book calmed some very frazzled investor nerves.

At least for now, beige is Wall Street's new favorite color.

Sparked by the Fed data, stocks staged an impressive afternoon rally. In fact, the NASDAQ closed at its absolute highest print of the day on a 5% pickup in volume. The market internals were bullish all day, even as the market meandered for hours ahead of the Fed report. If you want to know which way a static, sideways market is likely to break, check the market internals for clues.

A look at the charts tonight
shows that the internal bleeding has stopped. A lot of work lays ahead for the bulls, but Wednesday was an important first step.

The predictive value of bullish gravestone dojis and the IBD100 gained some street cred as well on Wednesday. While the broader market has convulsed for weeks, leading stocks remained surprisingly sanguine. 7 distribution days in 23 sessions produced exactly one day of selling on the IBD100.

This has been a weird disconnect, but markets rarely fall apart while the fundamental leadership remains healthy. For the record, the IBD100 outpaced the market higher on Wednesday, adding 1.6% on excellent internals. 31 of 100 stocks printed accumulation days, a solid stat considering yesterday's 29% jump in volume.

The NASDAQ followed-through on Friday's test of triple support (green arrow), and the bears have now let an easy kill slip away. However, hidden in plain sight is the very real threat of a bearish head-n-shoulders. The only way for the bulls to neutralize this is to take out the old high on mighty volume. The indicators are providing no help at all, especially the very crappy MACD.

Both the bulls and the bears have been here before, and both sides know what needs to happen. One thing is for certain: it's going to require more than haute couture.

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If the chart below were a stock, would you buy? The good news for the bulls is that it's not a stock, and the answer is "no". In fact, after the nasty reversal candle, most investors would point out those three yawning gaps just below. Contrary to popular belief, not all gaps fill. However, if PPI and CPI contain no surprises, this chart will definitely cool down and provide the stock market some relief.

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They weren't exactly singing, "ding, dong the witch is dead", but few enjoyed the Beige Book data -- and that nasty yield candle -- more than the oppressed Banks. Technically, the BKX remains hospitalized, but at least it's above its 200-day. The green line is the old all-time high.

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Finally, the TOF Ratio enjoyed the benefit of Wednesday's colorful Fed data as well. Option investors weren't impressed by the morning's retail data, and spent most of their day buying puts. As a result, the TOF Ratio looked dreadful -- until about 2pm. The Beige Book succeeded in changing opinions, and investors shifted to calls.

The TOF Ratio is once more in perfect position, and Stochastics moving above 20 is particular encouraging.

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The market is utterly inflation-obssessed, and what happens next is totally dependent on the PPI and CPI data. Any negative surprise in these two reports will produce a horrific relapse in the stock market.

Given the high yields and the crop of distribution days, the advantage is still tipped in the bears' favor. But they need help -- quickly!

Until tomorrow, have a great evening.



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