Tuesday, July 24, 2007

Leadership Freefall

For the first time in 14 months, the market is flashing genuine signs that it wants to correct.

As the SPX, NYSE, MID, SML and WLSH all took out 50-day support on huge trade Tuesday, leading stocks went into a freefall. In fact, this marked the single worst day for the IBD100 since Feb 28. Even worse, the internal metrics haven't been this bad since May 2006.

On Tuesday, the IBD100 tumbled a stunning -3.7% as 96 of 100 stocks closed lower. A decisive 52 stocks printed distribution days vs. just 3 stocks that saw accumulation. The selling was so widespread that 62 of 100 stocks shed -3% or more.

It's time to raise cash.

42 IBD100 stocks now trade below their 20-day -- a number that doubled on Tuesday. Neither the February Shanghai selloff or the June subprime meltdown produced this type of reaction from the market leadership.

This weakness is something new, and nearly always signals a shift in trend. It will take downside follow-through to confirm the signal, but the odds now favor the bears taking control. How long and how far they can carry the ball is unknown at this point.

The NASDAQ fell -1.9% on the second-highest volume since the February selloff. Still, the Composite, NDX and Dow are all in better shape than the rest of the market, and all three trade above their 50-day. If sellers take out the NASDAQ 50-day at 2620, the first Fibonacci support is 2575, then 2528.

To size things up, bottoming at the 200-day would be an 8.8% pullback. A 15% correction returns the NASDAQ to just below the Fib 0% line on the chart below.

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As the bears will attest, this has been an unusually stubborn market, one that has not fallen easily. As a result, even though the NASDAQ closed just 3.2% below a record high, New Lows have already spiked to levels associated with key IT bottoms. This type of spike so close to a record high deserves attention going forward.

The chart below goes back to Oct 2002. As you can see, similar spikes marked bottoms, not tops. Welcome to the road less traveled.

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Though Financials got the headlines on Tuesday, Utilities were actually the worst performing sector on the SPX. On a day that saw both 10-year Treasury yields and energy fall, Utilities acted very strange and took a -3.5% shellacking.

It's hard to know for sure, but on Tuesday North Carolina lawmakers passed a measure requiring NC electric utilities to use more renewable resources and energy efficient programs. Meanwhile, the Illinois electric utility Ameron began a $1 billion give-back program at the urging of IL lawmakers.

Utilities pay nice dividends and are often viewed as a safe haven in times like these. However, they've been under selling pressure since early May, and were surprise losers again on Tuesday.

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While everyone loves their QID, technology stocks may prove unwilling participants as a pullback develops. As the charts below show, the odds favor SKF and SRS producing far better results. If you want to short an index with a ProShares inverse ETF, consider TWM. All four are included below.

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Finally, what a difference a day makes on the option floor. The TOF Ratio took a sharp hit on Tuesday. Not a crossover yet, but almost.

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It's rare to see the IBD100 take a beating like on Tuesday without the broader market shifting gears. Institutional investors are taking profits on the canaries, and it's a sign worth heeding. That said, the bears still need downside follow-through to make this pullback really stick.

Financials, Utilities and now Energy stocks are big reasons that the blue chips are suffering. However, the NASDAQ is still in an uptrend. With tech stocks rising, it's likely to require extra effort to push the Composite lower.

Also, like the spike in New Lows, the massive short interest is an unusual variable here as well. A NYSE short ratio of 8.4 days to cover suggests that pullbacks could be interrupted by fat bursts of short-covering. An 18-handle VIX is certainly giving this type of volatility a thumbs-up.

The bears haven't organized an advantage like this in a long time, and it's clearly their opportunity to lose.

Until tomorrow, have a great evening.




Anonymous said...

Great blog. How do you track the IBD100 durring the day?

dk said...

Thanks anon...Each week I download the IBD100 xls and create an equal-weight tracking portfolio. From this I cull a wide range of performance data.