Thursday, July 12, 2007

Bad News Bears

Perhaps the only one who had a day worse than the bears was fellow message board poster John Mackey (not pictured).

Stocks gapped and ran on strong volume Thursday, and the NASDAQ, NYSE, SPX, NDX and WLSH all posted record closes. The Dow did as well, actually printing its best day in four years.

On the eve of Harry Potter blowing into town, investors were also treated to the magic alchemy of TA. In just 6 1/2 hours, bearish triple tops shape-shifted into bullish flying W's. The bearish case suffered its most serious setback in months, and thankfully few bears are convinced.

The behavior of leading stocks over the past many months made today's action impressive, but not surprising. If you recall, last week -- as the pros vacationed -- the IBD100 vaulted a blistering 5.2% in just four days. Record short interest, frequent distribution days, high volatility, shaky market breadth and negative sentiment are historically no match for the benefits of monitoring stocks with the very best fundamentals.

As the stock market soared today, volume was actually mediocre for most of the session. This was a sign that rattled shorts played a key role in moving prices higher. The beauty of short covering rallies at new highs is that institutional investors don't have to commit huge sums of capital to see their portfolios swell. They just keep spending enough to feed the beast.

Of course, there was more to Thursday's action than seller's remorse, as market internals were outstanding (see charts). Breadth was strong, 85 of every 100 shares traded was a buy, and New Highs outpaced New Lows 577-162. The IBD100 added 2% as 82 of 100 stocks posted gains, 38 hit new highs and a whopping 47 printed accumulation days. Investor appetite for themarket leadership remains strong.

Pullbacks aside, none of this is the behavior of a market that has seen a top yet. Equities are telegraphing that Q2 earnings will be solid, especially in industrials, materials, technology and energy. Select healthcare, transports and a few other areas should do well also.

The NASDAQ was a good-looking chart last night, and it's even better tonight. The Composite has jumped outside its Bollinger bands, suggesting a near-term pullback is likely. However, secondary indicators all point to more gains ahead, implying that dips will continue to be bought.

Image Hosted by ImageShack.us






There are many excellent charts tonight (see industrials and materials) but one with arguably the most far-reaching implications for investors is the Tech Ratio. While the NASDAQ and NDX had superb days -- and INTC, CSCO, GLW, AMAT, HPQ, SNDK and others went ballistic -- DJUSTC (aka the Tech Index) soared a remarkable 2.4%.

This pure-play index of 205 component stocks touches every subsector and market cap. After a 7-year technology drought, today's performance drove the Tech Ratio to the edge of a 3-year high and a secular Buy signal. The NASDAQ is returning to a leadership role, and this has enormous implications for the stock market.

Image Hosted by ImageShack.us






The horror of the dotcom collapse seven years ago appears to have altered investor psyche. Even though the NASDAQ is up 700 points and 34% just since last July, very few investors are actually enjoying this market. In fact, many are more suspicious than ever -- even bearish -- although both exchanges sit at record highs.

A number of important market events have occurred over the past 5 months that suggest the current rally still has a ways to go. I've posted about these before, but a review of key highlights may be helpful at this juncture.

All markets sell off and this one will too. However, unless something changes dramatically, the evidence suggests that near-term selloffs will be short-lived, and this rally could go on longer than many investors suspect.

Until tomorrow, have a great evening.

best

dk

-----------------------------------

Bull Market Review

Feb 27 - Mar 3 -- A 9% Shanghai plunge takes the US markets down 7% in a week. Bearish investor sentiment skyrockets overnight, the VIX doubles in three days, and fear swells by every metric. Most feel the bull market is over, and recession fears are at fever pitch.

Mar 15 -- 11 days after Shanghai, a huge intraday reversal at the 200-day surprises amateurs and pros alike. The IT bottom is in.

Mar 21 -- Marty Zweig's famous Nine-to-One Up Day. A rare event, Up Volume outpaces Down Volume by a ratio of 9-to-1. Every bull market in history has started with one of these.

Mar 22-24 -- A 5-10-20 Buy signal is triggered on each of the major indexes. After four months, it is currently still in place.

Mar 24 -- The 2-year/10-year yield curve inversion heals.

Apr 4 -- The TOF Ratio triggers Buy signal.

Apr 10 -- NYSE returns to new all-time high.

Apr 16 -- The Day of Global Highs: Brazil, Mexico, Australia, China, South Korea, France, Germany and England, along with the SPX, NYSE, RUT, MID and WLSH, all hit record highs.

Apr 18 -- The Dow returns to new all-time high.

Apr 19 -- US markets unfazed by second Shanghai selloff. Surprisingly strong Q1 earnings are primary investor focus.

Apr 20 -- Dow Theory confirms bull market as Dow, Transports and Utilities simultaneously close at all-time highs. Last Dow Theory confirmation was in 1998.

Apr 22 -- NASDAQ, NDX and SML return to new 6-year highs.

Apr 24 -- The SOX hits new 52-week high.

Apr 25 -- Dow hits 13,000 and New Highs outpace New Lows an astonishing 602-69. Another Dow Theory confirmation -- the second in 5 days.

May 5 -- Copper is up a whopping 60% off the Feb low.

May 15 -- The 3-month/10-year yield curve inversions heals.

May 30 -- US Markets ignore third Shanghai selloff.

May 31 -- "Sell in May" never happens. The NASDAQ closes month at new 6-year high.

June 1 -- SPX hits new all-time high.

June 7 -- Bear Sterns hedge fund woes surface. Bonds sell off, NASDAQ tumbles 45 points and VIX jumps 22%. Fears of market correction are widespread.

June 13 -- 10-year Treasury yield hits 5.31%, highest level in 13 months.

June 15 -- NYSE short interest level hits 3+% of all shares outstanding, highest level since 1931.

June 16 -- NASDAQ unexpectedly hits new 6-year high.

June 21 -- Tech Ratio hits new 18-month high.

June 23 -- NASDAQ prints its 10th distribution day in 7 weeks.

June 29 -- Last week of June sees heaviest QID volume ever.

July 6 -- IBD100 gains 5.2% to post its best week in 13 months.

July 12 -- US Markets gap and run to new highs. Dow has biggest point day in 4 years.

4 comments:

muckdog said...

I've been expecting a correction for quite awhile. Waiting for Godot.

Bill Luby said...

Just FYI, in case you are unaware of it, this post and previous posts have been cross-posted at StockHigh.net

dk said...

Hi muck...I hear you. For months, I've given the bears wide berth at all the right moments. However, each time they were in position to slit the jugular, they dropped the knife and ran. For now, they're all growl and no bite.

Hi Bill...thanks for the heads-up, and I appreciate you watching out for me. Aaron is a high school student who runs the blog and asked permission to do the re-posts. Always happy to help the "yutes".

Riva said...

This is great info to know.