Monday, July 09, 2007

Five in a Row

The NASDAQ printed its fifth straight 6-year high on Monday, despite another day of weak, midsummer volume.

Outwardly, the market is gripped by the widespread anticipation of an imminent correction. However, the performance of leading stocks -- and even the market itself -- suggests that this an unlikely near-term outcome.

Last week, while the NASDAQ rallied 2.4% on low, holiday trade, the IBD100 vaulted 5.2% on heavy accumulation. In fact, this was the biggest weekly gain for the IBD100 in 13 months, a feat made all the more impressive in that it took just four sessions. This record also happened in the face of rising Treasury yields and crude prices, and a 4-week high in bearish sentiment (54%) at

On Monday, this pattern of leadership strength continued. The IBD100 tacked on 0.8% as 60 of 100 stocks made gains. This wasn't "melt up" action either, as a beefy 44 stocks hit record highs, and 35 stocks saw accumulation.

While leading stocks have set the pace, stock strength is visible in other key areas of the broader market as well. Monday saw new highs in Materials, Industrials, Technology and Energy. Transports sit just below a new record -- even with $73 oil -- and the downtrodden Consumer index is just 1.2% below an all-time high. Even the SPX and Dow are now less than 1% below new, all-time highs.

Housing collapse or not, markets don't fall apart when leading stocks and cyclicals are under steady accumulation. In fact, with the IBD100 at all-time highs on the eve of earnings season, market naysayers are in the unenviable position of looking to the dreaded expression:

Yes, but this time it's different.

Since bouncing off the 50-day, the NASDAQ has climbed 110 points and posted gains in 7 of the past 8 sessions. MACD has broken out of its downtrend and is at a 5-week high, and ADX is curling up after its first visit below ten in 17 months.

However, volume has been wickedly low for two weeks, and tonight the Composite is printing a respectable bearish hanging man. "Sell-the-earnings-news" profiteering could descend on stocks this week, but unless something new develops, there's little to suggest we're facing The Big One. Pullback, yes. Meltdown, no.

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One of the Great Truths of the current 4 1/2-year bull market is that stocks haven't had a 10% correction since bottoming in October 2002. While this is true for blue chips, few point out that the NASDAQ has actually had four corrections since the 2002 bottom.

The weekly chart below shows these four periods. The average length of each correction was a respectable 18 weeks, and the average pullback was 16.4%. While the blue chip ascent has been largely uninterrupted since 2002, the NASDAQ has corrected roughly once a year. As technology stocks continue to strengthen, this history of authentic backfilling plays into the NASDAQ's prospects for longevity.

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Option activity suggests that investors are hedging the current record-bursting short interest with calls. As a result, the TOF Ratio is enjoying a positive crossover, a rare occurrence so soon after confirming negative.

The most interesting feature of this chart is the clean, uninterrupted move higher in the Stochastics. There's some real "uh-oh" going on in the option pit. Short-term, the TOF Ratio would benefit from some put buying, but otherwise it's pointing to higher stock prices.

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The market is overbought at new highs on thin volume, and the VIX has a 15-handle. Short-term, things could get messy, with a lot of "told you so" downside drama. However, until institutions abandon the fundamental leadership en masse and dump the cyclicals, any gut-wrenching volatility will end with more buying.

I hope everyone had a great weekend, and it's nice to be home.



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