Thursday, July 19, 2007

Tough Day Ahead?

I'm on a busy schedule this evening -- and gone all day tomorrow -- so unfortunately this is a short post


Thursday was a good day for stocks, but earnings shortfalls by cap-weight titans GOOG and MSFT won't make it easy for the bulls on Friday.

Volume was strong all day Thursday, but trade was still down a bit from Wednesday's total. This isn't optimal behavior for a market tagging record highs, especially on a day that saw the SPX finally take out its all-time closing high.

However, despite earnest pleas (and warnings) from pros and amateurs alike, the market itself continues to offer few concrete signs that it's ready to pack it up and go home. Pullback, yes; Correction, no.

The IBD100 is a proxy for the market's fundamental elite, and after two weeks of huge gains, it's taking a breather this week. That said, there's no sign of the ripping distribution and massive price collapse this index flashes at market tops. On Thursday, the IBD100 matched the NASDAQ's 0.8% gain as new highs jumped from just six on Wednesday, to 20 on Thursday. Also, 26 stocks saw accumulation vs. just nine seeing distribution.

Echoing the IBD100's behavior, Charles Kirk at The Kirk Report made an interesting observation today. Charles assembles his best investment ideas from a set of remarkable, custom stock screens he's developed over the years. Charles has been tepid on the market for some time, but would be happy to warm up if his best ideas were actually doing better. For example, he put together a list of 19 earnings plays this past weekend, and so far, 10 are up, and 9 are down. These are excellent picks, and this 10-to-9 performance about sums up the best-of-breed this week.

The Dow went from 13,000 to 14,000 in less than half the time it took to cross the previous 1,000 points. Even with this acceleration, the NASDAQ is actually the year's leading index with a 12.6% gain. The market is in a potent uptrend, and it's going to take a fresh and powerful plot twist to truly reverse its course. As we all know, there is certainly no shortage of potential catalysts.

The one constant in 90% of all OE Fridays is epic volume, starting with a giant spike at the open. If this action holds true, Friday will either be just the 2nd distribution day in a month, or the 13th up day in the past 16 sessions. Either way, the bulls have had it much, much worse.

Have a productive day tomorrow, and I'll see you over the weekend.



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beingpossibility said...

"the market itself continues to offer few concrete signs that it's ready to pack it up and go home. Pullback, yes; Correction, no."

True, but as a skeptic, could you offer any indications from days or weeks prior to previous corrections that you could point to and say yep here comes a correction? My point is that the charts and technicals all look good until they don't.

dk said...

Thanks for the comment, bp, and your point about charts and technicals is a good one.

Regular readers know (and this post doesn't make clear) that I monitor the performance of stocks with the very best fundamentals -- and not just TA -- to help assess the health of the overall market. As a proxy for this fundamental leadership, I use the IBD100 .

Without fail, when the market is truly ready to reverse and meaningfully correct, the IBD100 implodes on a massive, spectacular scale. For example, the NASDAQ may slip 0.8%, but the IBD100 will unexpectedly tumble 2.7% on huge trade. When the NASDAQ falls 1.9%, the IBD100 will spiral 4.7% lower as just 3 of 100 stocks close higher.

Without fail, institutional investors BAIL on the best-of-breed with extreme prejudice during corrections. If it's just a pullback, the IBD100 will fall in-line with the broader indexes.

I've used versions of this caper for over 14 years, and it's been remarkably accurate. The last time this signal occured was May 2006. Curiously, it didn't happen in late Feb this year. Despite the Shanghai drama, the IBD100 fell in-line with the broader market, and stocks quickly recovered to hit new highs.

Investor's Business Daily doesn't publish perf data on the IBD100, so each week I create a tracking portfolio and monitor a wide set of perf stats every day. Almost every daily post of mine includes some mention of leading stock performance.

Anyway, that's what I menat by, the market itself continues to offer few concrete signs that it's ready to pack it up and go home. Thanks again, and I hope this helps.

beingpossibility said...

Thank you DK, I find that very valuable information. Is the opposite true? Meaning coming out of a bear phase the IBD100 will rise more explosively than the major indexes.

dk said...

I certainly wish it was that simple. The IBD100 is famously useless at picking bottoms. After being shredded, the fundamental leadership takes a while to heal and gather momentum. For example, after the May 2006 meltdown, the IBD100 didn't hit a new high until Nov, even though the NASDAQ bottomed in July.

So, you use other signals, specifically, follow-through days. After a huge, high-volume, potential "bottom" day, the market will stage another similar day 3 to 10 sessions later. Every bull rally in history has had this huge, follow-through day.

The current bull rally (started July 2006) set stock market history, because its follow-through day happened on Aug 15, 21 sessions after the bottom. In recorded market history, the gap between bottom and follow-through has never been as long as the current rally.

Bill Luby said...

Wow. Two "without fail" assertions in one post!

Where do I sign up?