What Do You See?

If you think you're seeing things, that's because you are.

Like an optical illusion, the market appeared both bullish and bearish on Monday. Stocks started out strong, then gave back gains, especially on the NASDAQ. Composite volume fell 13%, which explains why the bulls couldn't hold the gains: the volume wasn't strong enough to support even normal selling pressure. Unfortunately, after a big selloff, light gains on lower volume isn't what you want to see.

Fundamentally, the bears have well-discussed advantages. Now, they're technically putting together yet another credible setup to drive the stock market lower. This is a post-expiration week, and 11 of past 18 have been negative. Also, with 800 companies reporting by Friday, the earnings picture will be much clearer in four more sessions. Lots of things send markets lower, but one of the few things that keeps them there is crappy profits.

One problem for the bears is that leading stocks aren't telegraphing any long-lasting change. After an off week, the IBD100 came back strong on Monday. As market volume slid, an impressive 29 IBD100 stocks printed accumulation days, while just 7 stocks saw selling pressure. Monday saw buying return to the fundamental leadership, and the IBD100 gained 0.8% as 62 of 100 stocks moved higher. Also, a solid 22 stocks hit record highs. This is inconsistent with forecasts for a big, near-term tumble in stock prices.

Monday marked the 18th straight day that the NASDAQ closed above its 13-day. A close below has rarely been good for the bulls ST, so defending a level just 10 points below Monday's close is unusually important.







Without question, one of the most fascinating features of this market is that it is so stupendously "pre-sold" for a hefty pullback. Not only is professional short-interest at goat-gagging levels, Odd Lot Short Sales are now at a 5-year high of 8.4 million shares!

The chart below shows that over the past two weeks, retail investors swung hard to the short side. This is inconsistent with market tops, and complicates market dynamics even more than they already are. This chart is not a good look for the bears.








You know we're in a strange, new world when the VIX can be harnessed by a 6-month rising trend channel! Even weirder is the fact that stocks have climbed in the face of this volatility rise. The short-interest ratio and trending VIX are just two signs that there is no lack of investor fear in this market.








The TOF Ratio is in excellent position, suggesting that stocks still have room to run. In an unusual twist, option investors seem to be hedging the historic short interest with calls.









The bears are perched in the Book Depository once more, awaiting yet another clean shot at the motorcade. They have a lot of things going for them, but market collapse pre-sales aren't one of them.

Whether you see a woman's face or a sax player, reports on US housing, GDP, the Beige Book and earnings point to an interesting rest of the week.

On a lighter note, "Fake Jane" Wells blogged about Pickens in China this morning at Funny Business (I certainly hope Becky Quick has a sense of humor - lol).

Until tomorrow, have a great evening.

best

dk