Wednesday, July 18, 2007

Dodging Bullets

While Bear Stearns showed everyone the pitfalls of feeding off of garbage, stocks skirted a bloodbath that had seemed almost inevitable.

In very bullish action, the NASDAQ overcame heavy selling on Wednesday to bounce at its 13-day and close down just -0.5%. Blue chips did better, but it was the tech-laden NDX that led the market with a scant, -0.19% slip.

Market internals were terrible all day, which made the bear's inability to hold prices lower very conspicuous. Water defied gravity and flowed uphill on Wednesday, and sellers have no one to blame but themselves.

Volume started off unusually heavy but slowed as the day wore on. Heavily-traded Wednesdays have been a recurring pattern during OE week, and the July expiration appears to have been no exception. Other than January, every OE week in 2007 has closed higher, and this week would make it six straight.

The IBD100 laid low and consolidated, essentially avoiding Wednesday's hijinx. Like the NASDAQ, the IBD100 fell, bounced back and closed down -0.5%. However, volume was mellow. Just 12 stocks saw accumulation and 17 printed distribution, leaving 71 of 100 to consolidate on volume lower than the day before. Stocks with the very best fundamentals attract steady hands, and these pros were unperturbed by Wednesday's broader drama.

The stock market is in a strong uptrend, especially the Dow and NASDAQ. Despite the steady drumbeat of economic woes, stocks continue to show remarkable tenacity. There are few things more bullish than a stock market that ignores bad news.

When the NASDAQ is in rally mode, it skips off the 13-day until it's time for a rest. Currently, the Composite hasn't closed below the 13-day since confirming at the 50-day -- fourteen sessions ago. The odds favor the market continuing its climb higher.

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Once more, Technology, Transports, Materials, Industrials and Energy all closed within 1% of new highs. This makes for a tough case that the stock market is on the verge of falling apart. All but Technology are included below.

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Two months of consolidation prior to Friday's big breakout has taken the stuffing out of the market internals. They're not in tragic shape, but they've definitely seen better days. There's also a good explanation for the weakness.

Wednesday saw a strong spike in new NASDAQ lows. A closer look reveals that over half of these new lows were financial stocks, and another 13% were consumer- and housing-related. This also translates to poor breadth and up/down volume stats as well. It's important to keep a close eye on the internals (see charts), but in conditions like this, stocks can still move higher when the internals are less than ideal.

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On Wednesday, the VIX closed with a 16-handle, even as the stock market sits just below new highs. Of the many descriptions that can be levied against equities, complacency isn't one of them.

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While Rupert Murdoch threw another Bancroft on the barbie, Barney Frank and Co. tried cooking Ben Bernanke with hot air. Bernanke proved largely heat resistant, though he did take a scorching on credit risks, M3, the schizophrenic dollar policy and even the use of obtuse Fed speak. Political "bloviating" took hold when "income inequality" took the floor. Most importantly, Bernanke stuck to his guns on inflation.

The lively week continues Thursday with more earnings, economic data and FOMC minutes. Meanwhile, stocks look like they want to move higher.

Until then, have a great evening.



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