Monday, July 02, 2007

Leading Stocks Go Supersonic

While the NASDAQ closed at a 6-year high on dubious volume, leading stocks put in a blistering performance on Monday.

The IBD100 accelerated past the broader market by a huge margin, soaring a whopping 2.7% as 85 of 100 stocks moved higher. 38 stocks added 3% or more, and three stocks posted double-digit gains.

But the real dazzler wasn't even the 41 stocks that hit record highs. As NASDAQ volume slid 17%, a stunning 41 IBD100 stocks printed accumulation days! Money poured into the market leadership on Monday at levels unseen thus far in 2007.

There is more to this shaky market than meets the eye, and two opposing views appear headed for a showdown.

On one hand, there have been extensive preparations for a market top. Short interest is at record levels, inverse ETF volume is huge, put-call ratios are bearish, volatility is high, options are expensive, double-top warnings abound, housing lays wounded, the dollar is tumbling, hedge funds are teetering, distribution is frequent, technical indicators are weak and professional money managers are near-unanimous in the expectation of a pullback or correction.

Meanwhile, the NASDAQ and NDX closed at 6-year highs, the other indexes are within 1.6% of all-time highs, leading stocks are outperforming, rates are accomodative, liquidity is high, economic data is favorable, cyclicals are strong, multiples have contracted, global economics are expanding, the presidential cycle is here and -- most importantly -- the market is on the eve of an earnings season that could surprise to the upside.

These two sets of market conditions are incompatible. If the market doesn't correct soon -- which it easily could -- investors may experience the mother-of-all-short-covering rallies. As of mid-June, over 3% of all shares outstanding on the NYSE were held short, and similar figures are estimated for the NASDAQ. These are staggering numbers, and are the highest in 70+years.

Given the volume accumulation of leading stocks both today and over the past many weeks, one of the few scenarios that makes sense is that Q2 earnings will be strong. This makes an upside market shock no longer just a remote improbability.

The bears are now in a tricky spot.


One day does not a green arrow make. Monday's low volume means that the Amber Alert remains in place despite the 6-year high. The market has been oscillating between support and resistance for two months. Until one or the other is breeched on huge trade, TA insists that there's no hurry to change signals.

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Today, Bill Luby noted that Stock Trading Update cited the famous axiom: "Tops aren't built on fear". They're built on enthusiasm, and fear levels point to anything but enthusiasm. In fact, the VIX may be printing only its 5th stock Buy signal in the past two years.

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Not only did the NASDAQ and NDX close at record highs, the Cyclical Index closed at an all-time high. The CYC is an important bellwether: if Copper has a Ph.D. in Economics, the Cyclical Index sits on the graduate faculty. Not only does the CYC appear to be printing a fine double-bottom, the chart also suggests that a strong earnings season lays ahead.

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Two months of frequent distribution days have inflicted technical damage to the indexes. However, the bears continue to baffle with their inability to take the kill shot.

Four sessions ago, the opportunity was squandered again. Now, on a holiday-shortened week, the bulls have a chance to pull into the lead. Tomorrow is a short day, so the decision will likely be pushed off into the future. But who knows?

Until then, have a great evening.




Bill Luby said...

I love the IBD 100 stuff, dk...which reminds me, do you produce any IBD 100 charts that you might be interested in sharing from time to time?

Oh and thanks for the mention :)



dk said...

Hi Bill...Other than occasional mentions in "The Big Picture", Investor's Business Daily doesn't publish performance data on the IBD100. All the data I include is pulled from tracking portfolios I manage myself, and I've never gotten around to exporting it for charting purposes.

However, nastar has, and he charts the IBD100 against the NASDAQ on a regular basis. It's a crude presentation, but he posted
the latest version
on Monday. It shows the IBD100 at a new all-time high. It's up about 23% YTD.

Bill Luby said...

Muchas gracias, SeƱor.