Monday, June 18, 2007

Stealthy Strength

While the broader market paused on quiet trade Monday, leading stocks stealthily charged ahead.

In a sign that sellers remain scarce, the NASDAQ closed flat as volume tumbled a whopping 28%. Low-volume sessions offer great opportunities for bears to gangtackle prices lower. However, the opportunity slid by as institutional investors saw little reason to unwind their positions.

As a result, even though market internals were slightly negative and oil edged higher, the SPX spent the day trading in a 5-point range. This type of quiet consolidation is textbook behavior after last week's big move.

In fact, Monday's calm masked the fact that, beneath the surface, the rally rumbled on. Not only did News Highs trounce New Lows, 428-90, but the IBD100 had a field day. It tacked on another 0.6% as 52 of 100 stocks moved up. Even better, an impressive 34 stocks hit record highs. Not bad action for a day that saw the RUT slip 0.2%.

The technical indicators on the chart below describe an index that appears low on gas. MACD, stochastics, ADX, OBV and MFI have all seen better days. However, price stubbornly refuses to cooperate and move lower. The bullish perspective is that the market has just experienced an 8-week "mini-correction", and has now begun a fresh leg higher. Leading stocks are certainly suggesting this, as are options, the VIX, bonds, market internals and foreign markets.

If price does continue higher, ironically the "out of gas" indicators below suddenly become indicators with "room to run". Of course if this happens, countless individual investors' skulls will explode, but that's another story altogether.

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Treasury yields slid another 3 BP on Monday, but equities were very ho-hum about this development. If this seems odd to you, consider this fishy stat: in the past nine sessions, as Darth Yields climbed 3.4%, the Banks have climbed 2.7%!

If you throw in the positive yield curve and new NASDAQ high, the evidence mounts that the recent bond selloff wasn't driven by concerns of a Fed policy change or some unexpected inflation debacle. Instead, the bond market is adjusting itself to "no recession" and continued economic growth. Given the recent equity gyrations, it's ironic that both adjustments are good for stocks, and helps explain last week's stock rally.

The BKX and 10-year are included below. For the record, the days of yields with a "4" handle are probably over, but this shouldn't trouble the stock market significantly.

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Two weeks ago, I mentioned that backtesting the TOF Ratio revealed that the first negative crossover produced a warning sign, not a Sell signal. This seems to be the case yet again. Call buying produced a positive crossover for the TOF Ratio on Monday, and the Ratio looks poised for more improvement.

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Housing woes will be center stage on Tuesday, and it's unlikely anyone is expecting good news. Though the mainstream press will likely blame any market weakness on putrid housing starts and permits, look for better causes.

Also, look for heavy selling. For now, there are few signs of a market top, but tomorrow's a new day.

Until then, have a great evening.



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