Tuesday, July 17, 2007

Leaders Lag

As the NASDAQ and Dow tagged record highs, Tuesday's action had a strange twist: call it the Day of the Underdog.

On the surface, stocks were strong, especially technology. Also, Cyclicals and Transports tagged new highs for the second straight day. However, a closer looked reveals that beaten up Financial stocks surged as leading stocks lagged all day.

As the Dow flirted with 14,000, the IBD100 slipped 0.4%. The IBD100 didn't flash any warning signs, as its losses were light and internals were very balanced. 20 stocks made new highs, 18 stocks saw accumulation, and 23 stocks saw distribution. Yet, this was the first day in recent memory that the IBD100 persistently lagged the broader market in such a distinctive way.

When you add the INTC earnings reaction to the IBD100 wobble, the market looks primed for a pullback. However, it's important to keep a little perspective. Stocks are in a serious uptrend, and it's going to take more than IBD100 profit-taking and INTC volatility to bring it down. Today, Michael Ashbaugh layed out the TA case very clearly that the US markets have staged a technically valid breakout. Also, hidden in plain sight is that INTC guided higher, and the reality of that is eventually going to sink in.

Over the next few days, it may feel like the world's coming to an end. But a lot needs to happen before the NASDAQ signals that it's ready to give up its 50-day (about 5% lower).

Looming pullbacks aside, the NASDAQ remains a great-looking chart tonight, and it's in a position to endure some selling pressure before trend-changing damage sets in. In a confirmation of MACD, ADX trend strength is the sharpest it's been in over 10 weeks, and MFI is very solid.

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Without question, the most powerful group on Tuesday were the semiconductors. The SOX action was much more than just wishful thinking about INTC earnings as well. Not only did the SOX close at an 18-month high, a whopping 7 of the 18 component stocks closed at record highs! The strength has been going on for a while too, as every SOX component except for MOT is above its 50-day.

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SOX strength is not an isolated technology incident either. On Tuesday, the Tech Ratio closed at a 3-year high to finally trigger a secular buy signal.

This signal was first described in April, then discussed again three weeks ago in Time for Tech? UPDATE. Long story short, after a 7-year drought, technology stocks have been outperforming the broader NASDAQ since July 2006. Today they broke above critical resistance, and a secular shift back to technology leadership is underway.

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Another key indicator in the bull's camp is the TOF Ratio. Option traders have continued to show an appetite for calls. Like the NASDAQ, the Ratio is in the position of enduring some chop before triggering danger signs.

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Investment horizon and risk tolerance are the two biggest features in determining how each investor handles volatility. In periods of uncertainty during strong uptrends, I rarely unravel positions unless there's heavy distribution, but that's just me.

Not only will OE keep investors on their toes, there's oodles of economic data and earnings news still ahead this week. Wednesday sees inflation and manufacturing data, plus we get to watch Barney Frank try and convince Ben Bernanke to lower interest rates. By all accounts, Frank has really sharpened his rainbow for this one, so it should be an interesting discussion.

Until then, have a great evening.



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