Wednesday, July 25, 2007

The Four Horsemen

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Cramer's Four Horsemen (not pictured) have now all reported Q2 earnings -- and only one spent any time in jail.

While GOOG sits with an ankle bracelet, AAPL, AMZN and RIMM are on a tear. Like RIMM and AMZN, AAPL reported a monster quarter on Wednesday, and shares closed up 9% AH. Technology is leading again, and sellers will have trouble keeping this market down.

The housing data was terrible on Wednesday -- and leading stocks slumped again -- yet the bears still couldn't deliver the killshot. Once more, the NASDAQ reversed an ugly selloff to close higher. This was no cheap, inside day either, as volume was heavy. In fact, not only was it 1% greater than on Tuesday's selloff, it was the fourth heaviest NASDAQ trading day in 2007.

It's not like the market got any help from leading stocks either. As the indexes rose, the IBD100 fell another -0.7%. Just 37 of 100 stocks closed higher, and institutional sellers didn't back off either. A disturbing 40 stocks saw selling pressure greater than Tuesday's dumpfest. Internally, the IBD100 weakened further, as stocks beneath their 20-day swelled from 42 to 61.

In the past two days, the IBD100 has tumbled -4.4% while the overall market internals have deteriorated (see charts). Meanwhile, the market has barely budged: the NASDAQ is off just -1.6%, the NDX -1.2% and the Dow a scant -1.1%. Now, the market appears ready to move higher again. What's going on here?

On Tuesday evening, the NASDAQ announced that its short ratio had increased to 4.5 days in July. This is 9.3 billion shares sprinkled across 3,274 stocks, and that's on top of the stomach-churning 8.4 days of volume held short on the NYSE. Pre-sales are good for Deathly Hallows, but pre-selling a stock market correction is a terrible idea. An epic short ratio has put a floor under the market, and it shows.

The NASDAQ remains in an uptrend, just 2.8% below a new 6 1/2-year high. Leading stocks or not, this is a strong chart, especially if it resumes climbing without even touching the 50-day.

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The Tech Index caught itself at the Bollinger midpoint and makes a compelling case for a reversal doji. While the NASDAQ is up 13.9% off the March low, the Tech Index has rallied 17.9%. The Bollinger bands suggest tech stocks can run for a while.

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Another promising sign for the market are the Biotechs. After printing a new all-time high in April, the BTK pulled back 9.2% over the next three months. The BTK is now making a great case for a double-bottom, and the market always does better when the riskiest groups show strength.

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Just before 11am on Wednesday -- as stocks were in a power dive -- VIX maven Bill Luby posted a seven-word entry:

VIX at 19.46. Time to buy equities.

As if some magic rune had been spoken, stocks immediately reversed to close higher, while the VIX reversed to close lower. This action bodes well for higher stock prices on Thursday...but Bill, you're scaring me.

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Another guy who scares me is TOF, who was very unimpressed with Tuesday's selloff ("Too damn obvious if you ask me"). The TOF Ratio agrees, and a flight to calls leaves stocks prepped to fight another day. Nice call, TOF.

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If you look around, Wednesday's action left countless potential reversal dojis. The MID, RUT, Transports, Utilities, Cyclicals, Tech Index, SOX, and even the forlorn Housing and REIT Indexes are all showing a market that arrested its decline and stabilized.

It's highly unorthodox for a market to climb without the Financials. For it to climb without the Financials AND the fundamental leadership is even more unusual. But this market eats "unusual" for breakfast, and AAPL, BIDU, SYMC and QCOM are catering on Thursday.

See you then.




Bill Luby said...


Excellent insight on the $BTK and riskiest segments. You could add the FXI to that list as well.

With your prompting, I will definitely keep a weather eye on the IBD100 before getting fully committed again...


dk said...

Nice call today. Lots of data points were working against it, but that's why "VIX" rhymes with "tricks." :)

Trading Goddess said...

I love the Four Horseman pic!!!

Thank you for the laugh!!!