Wednesday, July 11, 2007

MacGyver!

The Plunge Protection Team isn't rescuing this market -- it's being saved by Angus MacGyver*.

With little more than a Swiss army knife and duct tape, investors escaped yet another tricky jam on Wednesday. The action was all the more impressive since this particular "jam" is potentially the biggest derivatives meltdown since Long-Term Capital Management.

Just one day after Moody's downgraded 399 mortgage-backed securities and S&P mulls $14 billion more, the stock market unexpectedly bounced back. How the bears failed to muster follow-through is anybody's guess, but apparently it's going to take some really bad news to take this market down.

In an impressive combo move, the NASDAQ closed the July 2 gap, bounced off its 13-day, rallied into the close and printed the strongest up volume since bottoming off the 50-day ten sessions ago.

Wednesday's action wasn't some fluky, short-covering rally either. Market internals were solid and leading stocks stayed strong all day. The IBD100 added 0.6%, with 67 stocks closing higher, 20 making new highs and 23 stocks seeing accumulation. Leading stocks continue to present little evidence that a top is in.

Of course, the market's death-defying behavior has nothing to do with the PPT or MacGyver. Wall Street is diabolically selfish, caring for nothing except earnings. Derivatives scandal or not, the market continues to telegraph another decent earnings season. Financials, housing and consumer stocks won't participate of course, but technology, materials, industrials and energy are all poised to do some heavy lifting between now and mid-August.

Tonight the NASDAQ is printing a very nice-looking chart. Since Wednesday's volume was actually higher than either of the two 50-day bounces (green arrows), Wednesday counts as follow-through and flips the second arrow green. Technically, the Composite could endure more selling and still be OK.

Image Hosted by ImageShack.us






These days, when it comes to market volatility, no possibility can be fully ruled out. So take it with a grain of salt that the VIX is printing a H&S variant tonight. The chart below shows that the VIX has a history of forming three peaks before settling into a period of fresh lows. The durations for these "triple tops" vary, but the resulting VIX fade has generally been good for stocks. That said, remember that the VIX has been on a rampage of late, so don't get your hopes up.

Image Hosted by ImageShack.us







The TOF Ratio continues to look quite rehabilitated. Not only is it in near-perfect position, the red 50-day EMA is at a 4 1/2-month high.

Image Hosted by ImageShack.us






MacGyver jokes aside, the current mortgage-related problems have extremely serious implications for Wall Street. If the situation is as bad as many believe, important public companies will buckle under the weight of their own stupidity, and the collateral damage will be extensive and unpredictable.

However, many companies will survive this trial largely unscathed. By avoiding financial, housing and consumer stocks, investors can measurably improve their odds of success. Monitoring price and volume action is the other market prophylactic. Now more than ever, avoid securities experiencing high-volume selling.

Tomorrow we see if DNA and the Alcan courtship can produce any pin action. Until then, have a great evening.

best

dk


*The MacGyver bit was poached from a recent post by the one and only Jim Kingsland. Thanks, Jim.

7 comments:

Tom said...

thanks for the info.
AL done deal who is next?
T

Anonymous said...

While yesterday's market turnaround has to be respected, I would quibble with your assertion that market internals were "solid". NASDAQ new lows were the highest since March and NYSE bullish percentages were lower (see http://headlinecharts.blog.com/).

Eric

dk said...

Tom...Good question. I suspect the acquisition headlines will cool a bit from here, but the Street is always good for a few surprises.

Eric...Thanks for the comments. I thought Wednesday's turnaround was a bit unexepected, and continue to be amazed that the bears can't put together downside follow-through.

You're absolutely correct about New Lows, and I could have chosen better words. My remarks were focused on NASDAQ breadth and Up/Down Volume, both of which were good yesterday. 20 fresh IBD100 highs a day after a market selloff was another indication that internals were OK.

Bill Luby said...

Triple tops in the VIX. Nice bit of mountaineering there, dk, and a new idea for me to chew on.

I hope everyone was roped in today...

Regarding the follow-through action, isn't this the same follow through the bears have been waiting for ever since your hiatus in January or whenever it was?

dk said...

Hi Bill...Good eye, as the evidence suggests that the pattern you describe actually began in August 2006.

For all the bearishness expressed through investor sentiment, volatility, distribution days, short interest, market breadth, etc., it is fascinating that the sellers remain unable to push price lower at the precise moment that it matters most.

I've heard that Lilly is pushing through an ursine formulation of tadalafil, but alas I digress...

Bill Luby said...

Perhaps a little late, but our mystery shoppers have spotted The MacGyver Multitool "The only tool you'll ever need"

dk said...

Too late? It's never too late for MacGyver! Gotta love the multitool, and thanks for the link.