Stocks Take a Spill

Stocks finally made good on growing internal weakness and tumbled on Monday.

The slide wiped out most of last week's gains, and may be the start of something serious. However, in truth it's too early to tell, as both the indexes and leading stocks remain in strong uptrends.

As you'd expect on a red candle day, market internals were poor. 7 stocks fell for every 3 that went up, and 8 out of every 10 shares traded was a sell. New Highs hung tough at 400, but the ratio over New Lows slipped to about 3-to-1.

NYSE volume accelerated 14%, marking a clear distribution day for the blue chip exchange. However, one surprising feature of Monday's session was the lack of NASDAQ volume. While the Composite slid a hefty 32 points, volume was just 0.06% higher than Friday (not even 1/10th of a percent). The NDX had a similar price move, but volume actually fell!

Many stocks saw their bids pulled in the afternoon, leaving them to slide lower on surprisingly light volume. For example, tech stocks such as INTC, GOOG, AAPL, FLEX, BEAS, RIMM, QCOM and dozens of others slipped on low trade. The Transports also fell on low volume, easily seen in leaders such as PCAR, EXPD and CHRW. In all, just 16 stocks on the NDX printed distribution days, an unusually low number for a 1.2% decline.

The IBD100 had a bad day, but certainly no worse than its peers. While the RUT fell 1.8%, the small-cap heavy IBD100 slipped 1.9%. About 1/3 of the IBD100 printed distribution days, the same as the Dow.

How far will the Composite slide? A trip down to the 50-day/Fib 62 would be a 3.5% pullback from Friday's high. For the record, a 10% correction literally takes us off the chart to about 2300. Regardless, the odds favor more downside ahead.







NASI is one of the original poor-man timing indicators, and SAR flipped to a Sell on Monday.







While the selling lacked intensity, it certainly was widespread. Every sector did poorly, though a continuing surprise is the weak action in gold and silver. The XAU did worse than most sectors on Monday -- including Financials, Tech and Healthcare -- and slipped below its 200-day.







As the market seems poised at the brink of collapse, the bond market further discounted the chances of a recession. While the 2-year/10-year curve has been repaired for over 5 weeks, the more finicky 3-month/10-year inversion is steadily moving in the right direction as well.







Finally, as bombs fall all around, the TOF Ratio -- like the IBD100 -- continues to hang in there.







Into every life a little rain must fall, and it looks like May 1 could bring more showers.

Until then, have a great evening.

best

dk

Kevin Calls It Quits

One of the better financial blogs, Kevin's Market Blog, is officially no more. According to his farewell post, a busy schedule made it impossible for Kevin to continue. Blogging is a tough avocation, and I deal with a time-poor lifestyle myself. It's easy for me to empathize with his decision.

KMB was a personal favorite of mine and a part of my daily reading habit. Kevin has a remarkable instinct for stocks and maintained a very lucid approach in talking about them. His street cred was also very high: he made calls, but when they went against him, he talked openly about it.

Kevin, you'll be missed, and I can only hope the bug to write will return someday soon. Until then, I wish you every happiness and success.

Thanks for everything.

best

dk

Markets Float Higher

Hot air must have lifted the markets higher on Friday, because it certainly wasn't breadth or volume.

For the second straight session, the NASDAQ and Dow squeaked out record highs on declining volume and breadth. This is as close to an engraved invitation to a pullback as the market provides. That said, how much of a pullback is another thing altogether.

The bears have a compelling case. We're at month's end, and that "month" also happens to be May. Throw in Dow 13K and there's lots of reasons to go away in May this year. After the shaky GDP data, the ongoing housing woes, etc., several pundits are predicting a strong seasonal selloff.

On the other hand, the market itself suggests something different. Regardless of what the prognosticators are saying, there are few genuine signs that the big money is ready to pull the plug and go home. Things could easily change in just a few sessions, but for now the market itself reads as pullback, yes; selloff, no.

Remember that investor sentiment -- whether measured by Hulbert, AAII, lowrisk, Ticker Sense or even the VIX -- is more cautious now than it was in late Feb, even though earnings have surprised and the market is back above its Feb peak. A <4% dip could prove irresistible for those tardy, cautious investors to step back in.

It will be interesting to see where the market stands next Friday, and especially how we got there.

Getting back to market internals, Friday's action raises a great question: how can the indexes move higher on day that 6-out-of-10 stocks move lower? It's a living example of the distortion caused by index weighting. On Friday, the cap-weighted NDX added 0.08%, but an equal-weight ETF version of the NDX (QQEW) lost 0.41%. The indexes are just part of the picture, with market internals being essential to a complete understanding of the market's overall health. For the record, the IBD100 kept pace with the broader market (a good thing), slipping just 0.3%.

The chart below looks ripe for a pullback, but it's hardly telegraphing an immanent sleigh ride down to the 50-day either.






The weekly chart clearly shows the impressive strength of this market. Volume has continuously accelerated, trend strength is now ascending, and MACD had a positive crossover this week.







One of the biggest problems with the current market are the Banks. While the broader market is back above its pre-correction highs, the BKX isn't. The less rate-sensitive Brokers are in much better shape and sit just 3% off a new all-time high, a good sign. If the market is going to fall apart in the weeks ahead, the BKX will likely be the first to go and will lead the way down. For now, it continues to hang in there and bounced nicely off its 10-week.








Technology had a decent week. The NDX clobbered the rest of the indexes and rallied 2.5% to a 6-year high on very strong volume. The SOX broke above 9-month resistance to close at a 52-week high, as did Networking. Currently, Software, Networking, Semis and Internet are all under noticeable accumulation. Below is the NDX and the SOX.









It could be a bumpy ride for investors this week. The key thing to watch -- both on the indexes and with the stocks you own -- is the downside volume. If stocks fall under the weight of huge volume, ignore at your own risk. Otherwise, the odds favor a healthy pullback. Regardless, everyone's stomach for risk is different, so please season to taste.

I'm on the road Thursday-Monday, but should be able to check in as usual.

Hope you've had a great weekend, and best of luck this week!

best

dk

Why Analysts Are Afraid of AAPL

Analysts have little experience processing charts like the one below. Instead of evolutionary growth, it depicts revolutionary growth, and revolutions defy quantification.

If you've ever wondered what a mathematical rendering of the iPod would look like, below is your answer. The most compelling thing is that the iPhone will likely be even bigger than the iPod, and their speedy, Intel-based, Vista-able computers will enjoy market share expansion during the next tech cycle.

One of technology's true innovators, things look very positive for Apple, Inc.

best

dk

Anti-gravity

Stephen Hawking and the stock market had something in common on Thursday: both floated in zero-gravity.

If you felt that your portfolio wasn't quite keeping up with the market on Thursday, you weren't alone. Even though all of the major indexes tagged new highs, breadth was negative on both exchanges. About 4 stocks fell for every 3 that rose on the NYSE Thursday. While Up Volume exceeded Down Volume on the NASDAQ, even that was negative on the NYSE. New Highs did outpace New Lows 513-93, but ahead of tomorrow's GDP report, a fair amount of profit-taking was going on today.

For now, Thursday's mixed internals offer little cause for concern. The IBD100 bucked the trend and had a strong day, adding 0.6% as 52 of 100 stocks moved higher. Most telling were the record highs -- a whopping 25 today. When the market's trending, anywhere from 8 to 12 daily record highs for the IBD100 is normal. Good earnings and guidance continues to be rewarded, a healthy sign.

Eventually profit-taking is going to hit the market, but fortunately the chart below has room to give. Fridays are known for profit sweeps, but last Friday shows that short-term calls are tough to get right.







On a day that saw RYL, BZH and PHM all decide to no longer offer guidance for 2007, the Housing Index rallied. Go figure. According to Bloomberg, positive guidance from a single builder -- MTH -- caused the whole group to go up. Really? Are we sure it wasn't Stephen Hawking's zero-G experience? I have no edge in the housing game, but it's fascinating to watch. Given the dreadful housing news everywhere you look, days like this can drive the bears nuts.







Something else that drove the bears nuts on Thursday were the precious metals. A common bear trade these days is to short the indexes, short housing and go long gold and silver. This has been a very tough trade this week, and today's action didn't make it any better.

NEM came out with poor numbers, and there's a lot of buzz about an IT rebound in the US dollar. Both are PM negative, and you can see the speculators unwinding their positions in the chart below. The XAU sliced through its 50-day on Thursday after recently failing to take out a triple top. Yuk.







While profit-taking hit the blue chips, select tech sectors actually had a decent day. Software and Networking are now at multi-year highs. The SOX keeps making new 52-week highs, and Internets aren't far behind. While the Tech Ratio shows it's too early for a cyclical tech upswing, specific tech sectors are seeing noticeable accumulation. Below is the SOX, which has been higher 6 of the past 7 sessions.








The AAII Bull Ratio came out today, and it shows that Dow 13,000 was greeted with skepticism by investors this week. Surprisingly, the Bull Ratio fell, a contrarian bullish reaction in the wake of record highs and decent earnings. The strength is making investors feel uncomfortable, and that's good for the market. The last thing this market needs is for everyone suddenly to become bullish.

The Hulbert Sentiment Index (HSNSI) is saying similar things. The HSNSI actually ticked higher to 42.2% from last week's 34.1%. This shows optimism, but is hardly the heat of wild abandon. On Feb 26 -- right before the correction -- the HSNSI clocked in much hotter at 62.4%. However, the Dow was 4% lower than it is now. In a nutshell, sentiment -- by all of the metrics -- remains contrarian bullish.








It's been a good run for stocks, and I suspect profit-taking will arrive in various forms soon enough. As long as volume eases on down days, a healthy process is underway. A massive distribution day -- like on the preliminary GDP report tomorrow -- would be a skunk at a lawn party for this market.

MSFT is up 4%+ as I write, so apparently any tumble won't be the fault of Vista.

Until tomorrow, have a great evening.

best

dk

Is It Time To Buy Tech?

It's been 7 tough years since tech stocks peaked in 2000. However, the Composite and NDX are back at new 6 1/2-year highs and popular tech names such as AAPL, AMZN, INTC, GOOG and many others are all showing strong results. Does this mean that it's finally time to buy tech stocks again?

Analyst comments are one approach to answering this question. However, when it comes to your money, the market itself typically offers a less partisan view. Fortunately, ratio charts can be particularly helpful in sorting out these types of questions.

Below is a 7-year ratio of the Dow Jones US Technology Index ($DJUSTC) and the NASDAQ. The $DJUSTC is made up of 212 component stocks across all tech sectors and market-caps. This diversity gives it an advantage over the NDX, which is only about 70% tech and strictly large-cap.

In a nutshell, when the Tech Ratio is climbing, tech stocks are outperforming the NASDAQ. Once it moves high enough, the market itself -- and not some analyst -- is telling investors that conditions for tech stocks have become favorable again.

The chart below shows that even though October 2002 was the bottom for the broader market, it certainly wasn't for technology. After falling together for 3 years, the NASDAQ and the Tech Ratio diverged in early 2003. The NASDAQ continued to improve, but tech stocks kept falling. It's surprising to see that -- relative to the rest of the market -- technology didn't actually put in a convincing bottom until just this past summer after the May 2006 correction.

The inverted H&S pattern looks promising, but from this perspective tech is clearly not yet out-of-the-woods. A good first step would be to climb back above the 40-week.







The chart below zooms in on the past 12 months. After the strong rally off the summer 2006 bottom, tech stocks peaked in Oct, but have steadily weakened ever since. The Tech Ratio is back above its 50-day, but the more formidable 7-month trendline lies just ahead.







While the NASDAQ and NDX have improved dramatically -- and individual names can be attractive buys -- the Tech Ratio shows that technology as a whole continues to be weaker than the broader market. Until the Ratio pushes through important resistance, it's too early to make a broad Buy call on tech. Since we all know many individual stocks are doing well, this chart is also a good reminder of just what a stockpicker's market this really is.

As a final point, skeptics often stress that the market is vulnerable because of the obvious non-performance by tech stocks. However, the NASDAQ has reached 6 1/2-year highs without the help of technology.

Imagine what's going to happen once the next cyclical tech phase finally kicks in.

As things develop with the Tech Ratio, I'll keep you posted.

best

dk

13,000

As stocks set records on Wednesday, bear blogs had a fresh twist on the famous seasonal axiom:

13K, now go away!

Unfortunately, if Q1 earnings and the economic data are any indication, it's unlikely to be that easy. Eventually stocks will come down of course -- and maybe even reclaim 12,xxx -- but short of some tectonic upheaval, those pullbacks are likely to be bought.

Stocks have had a bullish bias almost immediately after bottoming in March, and that continued today. Market internals were excellent, led by New Highs outperforming New Lows a whopping 602-69. On a day like today, a High-Low ratio of 9-to-1 is an encouraging, confirming sign. The market's appetite for risk is healthy.

The IBD100 returned to its leading ways, rallying 1.3% as 76 of 100 stocks posted gains. In another solid sign, 22 stocks printed record highs. It's worth noting that the IBD100 -- like the TOF Ratio -- continues to be one of those market indicators with an unusually high success record. Since IBD100 performance data isn't published, monitoring it is a hand-crafted process. As regular readers of these posts know, it's worth every minute.

The chart below shows that institutions are bringing the heat. Volume accelerated another 18% (on top of Tuesday's 16% pickup) as big money left their conspicuous footprints. As the NASDAQ printed a new 6 1/2-year high, all of the technical indicators point to further gains.






While the NASDAQ looks great, it's worth noting that the NDX looks even better. Volume swelled an eye-popping 30% as the NDX outran every other index on Wednesday. More importantly, each technical indicator on the chart below looks noticeably stronger than its corresponding indicator on the Composite. This is bullish, and also very depressing for QID longs.






Speaking of volume, the Composite volume chart below shows that the 50-day hit a new 5-week high on Wednesday. It's also begun accelerating again as the market climbs, a mandatory requirement for rally longevity.






This week's investor sentiment surveys from both lowrisk.com and AAII showed that the recent market strength finally made an impression on individual investors. Both surveys saw upticks in bullish sentiment. lowrisk.com climbed to 43% bullish/43% bearish, an 8-week high.

However, the TickerSense blogger survey reveals that bloggers -- mostly pros -- tilted noticeably bearish last week. The TickerSense survey has a bearish slant anyway, but seeing such a marked shift on a week that saw record highs and a Dow Theory confirmation is very surprising. It's also contrarian bullish. I'm very curious to see how next week's survey digests the current action.







Yesterday, option investors got spooked and fled heavily to puts. This relaxed the TOF Ratio, setting it up for today's near-perfection bounce-back. It's a little hot, but the Stoch (39) shows it has room to run further.







Days like today reveal the virtues of following the ball. Investors make fun of the expression, but in truth it's very difficult to stay in a position until the market clearly tells you to exit. The market and the economy often give conflicting signals, which can really tweak one's thinking.

Soon enough, stocks on the IBD100 will start falling apart for no apparent reason. On a day that the NASDAQ slides 1.4%, the IBD100 will tumble 3.1%. By then, the TOF Ratio will likely be very shaky as well. Then it will be time to follow the ball in another direction.

Until then, have a great evening. Tomorrow we get to see how much mojo AAPL, BA and QCOM have, and whether MSFT can extend what INTC, GOOG, AMZN and AAPL have started. Employment numbers add to the mix of what could be another lively session.

best

dk

Dow Theory Part Deux

As Dow 13,000 stories abound, Dow theorists everywhere are quietly tapping their slide rules in appreciation of another, perhaps more significant milestone.

For the second time in 9 years, a trifecta of new all-time highs on the Dow, Transports and Utilities is confirming the Dow Theory signal that first re-appeared on Friday for the first time since 1998.

A close at record levels is, of course, le reél affaire, but considering all the 13K fireworks, it's worth an intraday note nonetheless.

best

dk

15 Rounds

Buyers and sellers pounded it out today, with no clean knockdowns on either side.

Sellers dominated early, but dip buyers stepped in to rally stocks well off their lows as Composite volume accelerated 19%. This is bullish behavior, although mixed internals show it wasn't a solid win. While breadth was negative, Up Volume beat Down Volume and New Highs sailed past New Lows, 373-97. It's a close call, but in light of that long tail on the chart below, Tuesday edged to the bulls.

The IBD100 told an interesting tale. It lagged the broader market, sliding 0.7% as just 35 stocks moved higher. However, 6 stocks had completely horrific days: UCTT and IIVI each tumbled 19%+ on misses. Ouch. However, these 6 stocks accounted for all of the losses on the IBD100 on Tuesday. If you back out the bottom 6, amazingly the IBD100 would have posted a gain. Thermonuclear implosions aside, leading stocks continue to hold up well, and no key breakouts are failing for random, unexplained reasons.

OBV got its up day, and that long tail on strong volume is bullish. Technically, the Composite continues to look OK.







Another bright spot in Tuesday's action was that the Banks pulled a nice bounce off their 50-day. Nothing goes straight up, but when it's time to go down, style points count.







About seven sessions ago, Commodities began looking very wobbly, and one-by-one, the action took me out of almost all of my energy stocks. The CRB is perched bearishly at its 50-day, looking like it's ready to jump lower. If you'll recall, the broader market capitalized on Commodity weakness last summer and fall. Keep an eye on oil, PMs, etc. over the next few sessions to see how it impacts the broader market. Energy gets inventory numbers on Wednesday morning.






Though Semiconductors are hardly out of the woods, it was a great day for the SOX. The chip index printed a 52-week high and briefly pushed through 500 on Tuesday. Should the semis continue to see accumulation, the broader market may eventually benefit from their strength. At this point, it's still a very big if.







Amazon's numbers tonight continue the broader theme that Q1 earnings aren't any cause for widespread hara-kiri. However, tomorrow we get a fresh round of reports, plus data on manufacturing, housing and the Fed's Little Beige Book.

Lot's of stuff for investors to react to, which sure beats the alternative.

Until then, have a great evening.

best

dk

Chips

Doesn't Larry Wilcox look like John Krasinski from "The Office"?

So far on Tuesday, the chips are making good on Monday evening's positive TXN report. Below is the SOX weekly, which clearly shows Tuesday's important break above 6-month resistance to a new 52-week high. Gotta love the upcurling MACD.

Apparently, it's going to take more than sluggish Asian and European markets, weak consumer sentiment and poor housing data to bring this market down.

In a familiar pattern, a day of earnings leaders stealing the show is followed by a day of laggards catching a bid. Overhead, the broader indexes paddle along. This is exactly the action that propelled the markets higher in Mar-Apr, so let's see if it continues to produce results.

best

dk


Up over 500.

A Quiet Pullback

Very swamped tonight, but wanted to drop a quick note to say that stocks behaved well today. The small pullback on lower volume was near-perfect action on an OE Monday.

As noted earlier, the best part was that the IBD100 had a solid day, up 0.7% as 60 stocks moved higher. On a pullback day, you couldn't asked for a better sign that bullish spirits are alive and well.

The mainstream press said that stocks slipped on higher oil prices, but energy stocks had a very muted day. Also, the Transports eased on light trade, so I'm not so sure. Based on volume market-wide, looked like good-old-fashioned profit-taking to me.

Nearly 1/3 of the SPX reports earnings this week, which means that by Friday, the market should have a decent grasp of Q1 earnings. The big question tonight is whether the TXN report can goose the SOX tomorrow. Chips breaking through resistance would be a breath of fresh air for this currently tech-challenged market.

Until tomorrow, have a great evening.

best

dk

We need an up day tomorrow to protect OBV, but other than that, this is a great looking chart tonight on many levels. The Composite could continue to trade sideways for a while without suffering meaningful technical damage (though that certainly wouldn't be as much fun).

IBD100 Stealth Rally

While the broader market is flat today, the IBD100 is under serious accumulation and up over 1%. Amazingly, over 50 stocks on the IBD100 are breaking out of some type of consolidation, and 32 of those are printing record highs. That's a big number of new highs on a flat market day.

Obviously there are no guarantees, but historically these types of IBD100 stealth rallies have been bullish for the broader market.

They certainly were in March.

best

dk

OEX/NASDAQ Fibonaccis

As everyone weighs the pros and cons of this market, it's worth noting that both the NASDAQ and OEX are working through critical Fibonacci levels. Both charts have bullish implications for stocks.

The OEX is sending the strongest message. The biggest of the big, the OEX has been the blue chip laggard since 2002. However, the OEX broke to 6-year highs this week. Even better, it pushed through Fib 62 at the same time, When approached from below as the OEX has done, Fib 62 is regarded as beginning the "home stretch" of the epic Fib odyssey. This zone generally offers less resistance (the OEX fell through it in just 4 months), and price often accelerates upward from there (don't get too excited: we're talking MONTHS here). Note that the various technical indicators - Stoch, ADX, CCI and MFI -- look ready for a continued push higher.







The NASDAQ sits just beneath Fib 38, which is another key level. The Composite has -- more or less -- made two prior attempts at Fib 38 this year, and has been denied both times. Should it break above -- and the odds look good -- this turns over a whole new leaf for the NASDAQ. Like the OEX, various technical indicators support the idea of a fresh round of gains.





Nothing goes straight up, but these charts suggest that any dips will eventually be bought.

best

dk

Breadth Returns

The market was actually looking pretty good to me until I noticed Abby Joseph Cohen on CNBC Friday afternoon. Now I know for sure that the top is finally in.

Seriously, the best thing about Friday's action was that the indexes rallied from the inside out. After days of dreadful internals, stocks hit record highs on strong breadth and buy volume. Also, New Highs outnumbered New Lows by a very impressive 507-65. If you want to set some records, this is how you want to do it.

Even better, investors re-discovered their appetite for leading stocks. The IBD100 beat the broader market on Friday -- including the spunky Dow -- adding 1.3% as 77 of 100 stocks moved up. 16 stocks notched record highs, a solid number considering the IBD100 sloshed through a week of sub-par performance. The SPX was up 2.2% for the week, while the IBD100 added just 0.5%.

Volume slipped very slightly on Friday, though the chart below still looks excellent. MACD is very strong, some of the daily overbought conditions have eased, OBV bounced, and trend strength (ADX) is bottoming. If the sentiment indicators were correct, a week ago most investors didn't anticipate the NASDAQ at these levels this weekend.







The weekly chart clears out the noise and actually looks even better. Volume accelerated this week, while ADX trend strength has started to curl upwards.

After moving higher for 5 of the past 7 weeks, the weekly NASDAQ is now very overbought. However, strong uptrends can keep a chart in this position for quite a while. For example, in 2006 the Composite stayed overbought for 3 straight months (Aug-Nov), as the index climbed over 300 points. The red, slower stochastic line still has a ways to go. MACD divergence is another thing altogether. It will be interesting to see how momentum vs. price plays out over the next several weeks.






What a difference a week makes. Last Friday, the Banks were a shaky and feverish bunch. However, tame CPI numbers and solid Bank earnings revitalized the BKX this week. The Banks are back above their 10-week average and look poised for more gains.

Markets ultimately follow the direction of the Financials. If you'll recall, the Banks shot up early in the week, helping set the tone for the broader market advance. While "Dow 13,000" stole headlines, the Banks quietly outperformed the entire US market except for one sector: the Brokers. Below are both the Banks and Brokers, thankfully this week's #1 and #2 best-performing groups.







While everyone focused on the Financials this week, the most unexpected development came from the Semiconductors. Like the Dow itself, INTC has posted gains in 15 of the past 16 sessions! Joined this week by strong performances from LLTC, TXN, MXIM and NSM, the SOX rallied up to 6-month resistance.

The SOX has tested this resistance 6 times in 6 months, and each time was dramatically turned back the very next week. The key to success for the chips is immediate follow-through. Consolidation would be OK, but the SOX will benefit most from taking out 500 as quickly as possible. Another deep selloff next week will spell trouble again, probably for the broader market as well.







When stocks are rallying, talking about Treasury yields doesn't seem very exciting. However, next to decent earnings, lower yields were one of the primary drivers of higher stock prices this week.

Tame CPI data had interest rate doves cooing about Fed cuts again. Chief bond bull Bill Gross reiterated his prediction that the Fed will cut several times this year alone to save housing. Based on the known data, I remain skeptical of this. In the current economic climate, the only thing likely to break Bernanke's resolve (other than <2% core inflation) is rising unemployment.

Nonetheless, the bond pit strengthened the entire market this week (especially the Financials), but two areas stand apart from the others.

The first is the yield curve. For recession watchers, this week's bond action was the perfect tonic for a healthy yield curve. The 2-year/10-year inversion has now been normal for 4 weeks, and even survived a big test at 1.0 (chart below). Mainstream press coverage of this remains light (Bloomberg did publish an article on April 16), and most recession hawk economists remain very unconvinced. Q1 preliminary GDP comes out next week, which will probably bring the recession discussion back to the fore again.






The second area Treasuries impacted was the Housing Index. Though I'm no housing bull, this week the HGX made a critical move. Earlier, I said that Banks and Brokers were the best performing groups this week. Actually, I "mispoke" (thanks, Alberto Gonzales). With a 5.8% gain, Housing outpaced even the Banks and Brokers.

The chart below shows that since the 2005 peak, the HGX is making a credible tour of its Fib levels. Over the past two weeks, it held at the 62% retrace, and bounced back above its 40-week. There are definitely some eager beaver investors in the builders. Regardless, it's unlikely the housing mess will be over until the most painful and financially destructive part happens: the price of homes fall. Right now, no one's buying. Like an after-holiday sale at Macy's, cutting prices hurts margins, but it stimulates demand. For now, there are no real signs prices have started to come down, and inventory continues to build.







I began this post with a contrarian joke at Abby Joseph Cohen's expense (sorry, Abby). However, it was to help make a point about the current market. Abby Cohen is the poster girl for perma-bull hubris, and her story is a cautionary tale that every investor can learn from.

The reason we know Abby Joseph Cohen is because in February, 1991 -- at Goldman-Sachs -- she made a very gutsy call. With the Dow at 2365, she cut against her peers and said that the bottom was in. She was widely criticized for this at the time, but she was dead right, and it made ga-zillionaires out of lots of investors. When the correction hit in 1998, she said to Hold, and she was right again. More ga-zillionaires.

The problem came in 2000. In March, as the market tumbled and warning signs were everywhere, Abby Cohen ignored everything and recommended a mere 5% reduction in tech (from 70% to 65% of her model portfolio). She stayed with tech all the way down (her real failing), and the rest is history.

Abby Joseph Cohen is famous to us all because she stopped following the ball.

Even for the pros, it's easy to out-think yourself. As the current market proves, following the ball is far more difficult than it looks. However, unless you learn to do it with some success, it's hard to consistently outperform the indexes.

It's VERY tempting to break ranks and make anticipitory moves. This week in The Kirk Report, Charles Kirk interviewed the popular Bloomberg columnist and money manager, John Dorfman. It's a great interview, and Dorfman quotes the famous Wall Street joke,

"What's the difference between being early and being wrong? There isn't any!"

Dorfman's point is one echoed by pros across the ages: most investors make more money following the market than trying to get out in front of it.

I have no idea what's in store for the market near-term -- and especially not long-term. Fortunately, it doesn't matter. All I need to know is that the current trend is up. That said, there are a lot of forces at play that could change this trend. The market's overbought, economic data could be bad, earnings news could sour, and who-knows-what-else could change everything. Even more ominous, the Sell-In-May chorus can be heard everywhere this weekend.

The market's trending up, but it's no time to let your guard down. Long or short, watch your basket like a hawk.

See you Monday, and I hope you're having a great weekend.

best

dk

Dow Theory Confirms Rally

According to Dow Theory, Friday's close confirms the current rally, and suggests that there's more upside to come.

The Dow, Transports and Utilities each closed at new, all-time highs on Friday. This convergence is a rare event, and the last time it happened was in 1998. Though I'm not a huge Dow Theory fan, the work of Charles Dow, William Hamilton and Robert Rhea forms the basis of modern technical analysis, so it's worth noting when DT signals occur.

Richard Russell is currently one of Dow Theory's most visible experts. For the record, he's been very UN-enthusiastic about the current rally, and according to Peter Brimelow, Russell is only now at the point of conceding that, yes, this is a bull market. Of course, this could also be very contrarian bullish. Remember what happened after 1998?

Dow and Hamilton went to great lengths to say that Dow Theory is very fallible. That said, today's action is something we haven't seen in 9 years. It's particularly provocative that it's occurring at a US earnings trough while investor sentiment is generally poor. I'm also reminded of earlier this week, when so many of the world markets hit record highs.

Is today's confirmation the prelude to a fall, or the beginning of a new uptrend? It's a great question, which is why I'm parking the charts below right here for posterity.

best

dk

Chinese Crisis Averted

Like the lone protester holding back the tanks in Tiananmen Square, US investors stared down the aftershocks of a dramatic Chinese selloff on Thursday.

The action was a surprising show of determination by the bulls, and a marked departure from the US reaction to the Shanghai selloff on Feb 27. This time, stocks rallied back from the opening dip, and the Dow even squeaked out a second straight record close. The selloff even closed the gap on the NASDAQ, but j-u-s-t barely. Like Broadway choreography brought to Wall Street, buyers rushed in precisely at 2490.

Volume accelerated yet again, technically marking a third straight distribution day. This is usually the Kiss of Death for any rally (and it may yet prove to be this time as well). However, three days of increasing distribution -- and totally dreadful internals -- has cost the Composite just 13 points (0.51%). This has been no ordinary trio of distribution days.

Besides the accelerating volume, the Composite has actually sustained no real technical damage. MACD continues to diverge positively as the NASDAQ now flies a three-day bull flag. 2500 has held twice, and a little of the overbought conditions have worn off. However, the weak breadth and heavy sell volume are genuine problems that need to be reversed quickly. The bulls need to get busy soon.






Beat up stocks caught a bid yet again on Thursday, while stocks on the IBD100 underperformed. Held in place by semis and biotech, the NDX closed flat on Thursday. Meanwhile, the IBD100 fell 1%. Just 23 of 100 stocks on the IBD100 closed higher, and 17 stocks printed distribution days, an unusually high number.

It didn't produce the Mona Lisa, but the SOX followed-through on Thursday. Volume was heavy, a good sign. Also, the good news continues in Healthcare, as both the BTK and DRG had solid days. Below are the SOX and the BTK.








One place the Red Scare did reach on Thursday was the precious metals. Commodities overall have been weak, but gold and silver took the possibility of unsustainable Chinese growth the toughest on Thursday.






Option investors couldn't take it any longer and moved to puts, which cooled off the TOF Ratio, leaving it in a good position for another run.







As the charts and market action have been suggesting for weeks, there's a bid holding this market in place. With two weeks of earnings reports behind us, 65% of those companies have beat expectations. Decent earnings are no doubt responsible for a great deal of the current strength.

Three distribution days and a shaky IBD100 have me very cautious. However, the market also is giving off signs that it wants to move higher. Stay on your toes and let volume be your guide.

Until tomorrow, have a great evening.

best

dk

CELG Breakout

CELG has been a favorite of mine for many years, but it's been a persnickety stock to hang in there with. The best thing about CELG is that it has strong sales and earnings growth, which is hardly a given among biotechs.

This is a beautiful breakout in a market environment currently favoring biotechs. The odds favor a decent rally from here.

best

dk

Stocks Hang Tough

On a day tailor-made for a sharp fall, sellers had difficulty making it happen on Wednesday.

Given the grim after-hours sentiment Tuesday evening -- which extended to the futures Wednesday morning -- it was surprising to see the Dow, SPX and NYSE all print record highs on Wednesday. Despite the NASDAQ notching its 3rd distribution day since the March 21 follow-through, sellers had a hard time holding prices lower. On a 5% volume surge, the Composite gap didn't close on Wednesday.

The positive MACD divergence -- though slight -- is very visible this evening. However, divergence or not, if price doesn't hold at 2480, it's going to get ugly.






One of the big reasons stocks held up on Wednesday was the impressive follow-through day by the Financials. This week's tame inflation data has ignited a fresh round of rate cut buzz. Personally, I'm very skeptical, but bond investors aren't, and they've driven yields 2.3% lower in just 3 days. Banks are eating this up -- and decent earnings aren't hurting either.






Investors rotated into beaten up stocks on Wednesday -- like semiconductors, homebuilders, banks, etc. -- and leading stocks took a breather. The IBD100 was off 0.5% as just 32 stocks moved higher.

Meanwhile, the SOX saw its best accumulation in 8 weeks. Chip stocks made up 8 of the 11 biggest gainers on the NDX Wednesday. For the semis, today's action was nice, but in truth it doesn't mean much. For it to stick, the SOX needs follow-through -- quickly. For the SOX to gain any credibility, it needs to break above 500.







It's worth noting that contrarian analysis continues to point to more gains. A new article by Mark Hulbert describes that even though the stock market is back to its pre-correction highs, his Newsletter Sentiment Index is HALF the value it was at the start of the correction. Historically, this is very unusual -- and very bullish. At the February high, the HSNSI stood at 62.4%, and on Monday it closed at 34.1%. Meanwhile, the SPX, Dow, NYSE, RUT and MID are all higher! This is not what you typically see at a market top.

Investor Sentiment from lowrisk.com points to the same thing. Last week, as the stock market bullishly reversed and closed higher, bullish sentiment actually FELL from 39% to 33%.





It's hard to imagine the market getting through this week without some seriously volatile chop, but I'm never one to fight the tape either. I'm surprised the gap is still open, but the futures currently show sellers will likely get another crack at it tomorrow.

Since it's OE, there's probably a load of hurt that's yet to hit the fan.

Until then, have a great evening.

best

dk

Islands of Adventure

Due to the their calculation methodology, the Dow and the SPX don't gap at the open. These two indexes open each day a tick or so away from their previous close. However, the DIA and the SPY DO gap, offering a revealing look at the strength of the current rally.

The NASDAQ, Dow and SPY are each printing a bullish chain of ascending islands. These successive gaps have left shorts stranded below and reluctant bulls underperforming key benchmarks. With economic data and earnings reports coming in modest at worst, the indexes look like they have more gains in store. How much, of course, is a very different question.

So far on Wednesday, investors have seemed willing to buy the dips, action that's consistent with the charts below. However, lots of trading still lies ahead.

best

dk

Ready for Some Answers

Volume finally picked up as price printed a doji, which is another way of saying that today was all about tomorrow.

Today was also about US tax deadlines, but that's another story.

A 5-week rally on declining volume isn't my favorite and raises all sorts of questions. Fortunately, investors will likely start getting some answers tomorrow. Today's candle pattern -- and tonight's Yahoo earnings miss -- essentially guarantees an opening selloff. It's the selloff that begins answering the questions.

Everyone plays these moments differently. Personally, I watch for price/volume divergences. If a stock falls hard on light volume, I may hold. However, if it falls and volume is heavy, I dump with extreme prejudice. But that's just me, and everyone's gotta do their own thing.

If tomorrow IS a volatile day, the best part is that you get to peek at everyone else's hand. Beta soars and bluffs get called left and right. Selloffs are great because they famously expose both the weak AND the strong ideas.

They're also a process, and are rarely over in a day. Think about that when your stock starts going right back up after you sell it. Or maybe that only happens to me.

Recent stock action, market internals, the IBD100, economic data and earnings strength suggest that we'll see a healthy shakeout, but will be spared financial Armageddon. However, those odds have about a 40% margin for error, so be careful. It's OE week and May is right around the corner.

Today was a living commercial for me: New wireless router, $179. Wine and a nice dinner with the family, $86. Cutting a big, fat tax check the day before a selloff.

Priceless.

Until tomorrow, have a great evening.

best

dk

In the take-a-picture-it-may-last-longer department, I'm sticking this here tonight for posterity (just kidding). Seriously, as I mentioned on Monday, the low volume favors the gap below getting filled. That's 2491. Should things progress, the 13-day (dotted line) is the next target, which on Wednesday will be about 2478. If you're a Fib fan, the 50-day is your first target (62%).

Global Warming: Mystery Solved

Thank heavens for small miracles. The letter below was published April 16, 2007 in the Arkansas Democrat-Gazette and sent to me by a thoughtful relative.

It seems Mr. Connie Meskimen of Hot Springs, AR is the first among us to finally solve the riddle of global warming. I'm sure few will be surprised to learn that our "liberal Congress" is at least partly to blame (aren't they always?).

As with any good quest, the solution is always in the last place you look.

best

dk



Thanks to ImageShack for Free Image Hosting

A Global Field Day

It wasn't just the NASDAQ gap-n-run, or even the record US index highs. It was the record highs across the globe that made Monday's financial markets so noteworthy.

Monday was a day which spontaneously revealed the true scope of the current global expansion. Markets in Brazil, Mexico, Australia, China, South Korea, France, Germany and England -- along with the SPX, NYSE, RUT, MID and WLSH -- all notched all-time record highs. For the US markets, the best news was that the Financials caught a bid. The worst news was that volume was tepid yet again. Trading began in a blaze of glory, but volume faded as the day wore on. Institutional investors still aren't buying it -- literally -- while the shorts continue to grit their teeth and ride out the squeeze.

That said, market internals were phenomenal today. 70% of all public companies in the US closed higher on Monday, while 75 of every 100 shares that traded was a buy. Even more impressive, New Highs out-numbered New Lows an eye-popping 659-to-45! Volume or not, these are remarkable internals.

As if a metaphor for the lackluster volume, the IBD100 was strong -- but not stellar. The index outpaced the broader market, gaining 1.1%as 73 of 100 stocks moved up. Also, an above-average 26 stocks hit record highs. But volume among these 100 stocks left much to be desired.

Monday's gap-n-run leaves a bullish island in its wake for the Composite. The next few days define how important this formation becomes. The weak volume favors Monday's gap ultimately getting filled, but who knows? Few investors scripted the market getting this far, so a spirit of surprise abounds.






It was encouraging to see the Financials catch a bid on Monday. The truth about diamonds is that most are continuation patterns, thus stacking the odds against the BKX. Even though the Banks rebounded and moved upwards through both their 200- and 50-day, they aren't out-of-the-woods yet. The Brokers are less rate-sensitive and paint a much stronger picture.







Considering the synchronized strength of the global markets, it's worth noting that Dow Theory stars are equally aligned. The Dow 30, Transports and Utilities each sit within 2% of all-time highs, historically a very bullish pattern.









Even though we've been discussing it for several weeks, I wanted to park it here tonight that the BTK posted an all-time high today.







On Monday, while the NDX had a good day -- and Software hit a 5-year high -- the top ten gainers on the NDX couldn't have been more diverse: a school, two biotechs, a clothing company, a trucker, a telecom, an energy play, two internets and a video game maker. This is a very good sign, but also suggests that If you want to buy tech, you must choose your stocks carefully.






It's an interesting time to be in the market, and how far this madness goes is anyone's guess. While lots of investors get nervous around new highs, in truth they're very bullish and tend to beget more new highs. The global coordination of index records is very provocative, and it'll be fascinating to watch it all develop further.

The low volume is a big problem for me, and personally I've been been culling my own herd based on price/volume divergences. Strangely enough, those have been very few, and stocks in my universe continue to behave well from the inside out.

We get reams of new data and earnings numbers tomorrow, providing lots of opportunities for pin action. Up or down, it could be a lively day.

Until then, have a great evening.

best

dk

Copycat

Like in the old game show, "Concentration", as I scanned through various charts on Monday, I noticed one that looked v-e-r-y familiar.

The chart below superimposes the VIX behind the Proshares SPX ultra inverse, SDS. In periods of heightened volatility, the SPX really does move in close inversion to the VIX.

best

dk

The Big IF

It's about 10am on Monday, and a post this early in the session usually isn't worth the paper it's written on. However, I thought I'd mention two things in the event that things change for the worse and the picture below really does last longer.

If the gap-n-run holds today -- and that's a big if -- the NASDAQ will have printed a bullish island reversal.





Buoyed by C earnings -- among others -- the BKX has bounded through both its 200- and 50-day.




Volume is strong.

best

dk

Friday the 13th

Friday the 13th didn't exactly live up to its spooky reputation this week, as black cats laid low all day.

Similar to the action on Thursday, sellers exhausted themselves early on Friday, Then, amidst a widespread view that the market sits perched at the brink of ruin, stocks rose for the rest of the day, Some credit CSCO's raised guidance. Others say earnings expectations are simply too low. Charles Kirk over at The Kirk Report even jokingly suggested that, with all the Monday morning takeover buzz, no one dares NOT be long going into the weekend.

All kidding aside, the market itself appears to be saying something else. Price and volume suggest that at least a part of the rise is a short squeeze.

On Wednesday, Michael Kahn at Barron's quoted the famous TA axiom, "In price there is knowledge, but in volume there is truth." The truth is, while the market has advanced sharply off the March low, volume has declined. This is the classic genetic marker of short covering, and it's not the more bullish sign of accumulation by institutional investors.

The chart below shows total NASDAQ volume graphed against a shaded Composite price. The blue line is the 50-day average of Composite volume. At the start of 2007 (green arrow), volume accelerated dramatically as the market shot up, a very healthy sign. Then, in mid-Feb, volume flattened as the market made a two-week climax run (a warning sign). Volume then took off and peaked as the market bottomed (red arrow). From there on, as the market rallied, volume has steadily slowed.







Does the chart above mean the market is certifiably doomed? Not necessarily. The evidence suggests that only A PART of the low-volume rise is due to nervous shorts. There are clearly other things at play.

Skittish investor sentiment is certainly playing a role. I've described ad nauseum how the market is famous for rising with the fewest number of investors participating. As cautious investors sit and watch, aggro-types gobble up the stuff that's working. This rotation can be enough to spook weak shorts, and together the shorts and the aggros create a low-volume market rise. Materials, energy, and now healthcare and biotech are all under steady -- even heavy -- accumulation, while other chunks of the market wallow in despair.

Another sign that there's more to the low volume rise is the IBD100. The IBD100 has been solid since the March bottom, indicating that big money is still flowing into stocks with accelerating earnings. In 20 years of investing, this is one of the most reliable indicators I've found to track the market's short-term health.

On Friday, 57 of 100 stocks on the IBD100 moved higher, while a very impressive 26 stocks printed record highs. Also, while many IBD100 stocks are extended, over two dozen appear to be setting up for a fresh round of gains.

Except for volume, the daily chart below looks strong. For TA purists, the gap doesn't close until 2507. We're at some tough resistance and this index won't go straight up. However, price momentum is elevated, and there's a lot of TA buzz about what the positive MACD divergence may produce short-term.







Another set of indicators that's hard to brush off despite the low volume are the market internals. Breadth, Up/Down Volume and New Highs were all strong again on Friday. Breadth and Volume broke to fresh 7-week highs.











On the other side of the tracks are the Financials. While the Brokers are in far better shape, below are two looks at the Banks. The white candle on the daily chart isn't actually a white candle: it's a tourniquet. However, as long as the red line stays above the blue, it's not too late to save this group -- and probably the market.

The weekly chart shows hammers trying to pound out a floor. Regardless, the IT trend is still down. Lots of banks report next week, so we'll see. I still contend that the market will ultimately follow the direction of the BKX.








Below are a few weekly charts.

The white hammer on NASDAQ weekly makes this an impressive chart. After gapping higher, stocks tumbled down to the 10-week line then reversed course to close higher. This is very bullish behavior, and the volume was the best it's been since the shakeout four weeks ago.






I've mentioned Biotechs several times this past week, but after a sleepy Q1, the entire Healthcare sector has actually caught fire. Biotechs, Drugs and HMO's are confirming each others' moves in a rare showing of collective strength. Note that all three simultaneously are parked below record highs. There are a lot of good investing ideas in Healthcare these days.










The other two groups mentioned several times this past week are Energy and Software. Energy is on an upswing, and Drillers have shown the greatest relative strength. Tech overall is very sluggish, but Software sits just below a 5-year high. Barron's had a nice write-up on ADBE this weekend.








Despite the market's mid-week reversal for more gains, the AAII Bull Ratio shows that investors weren't impressed. Bullishness barely ticked higher, indicating a healthy level of skepticism still remains. This is good for the market.






Finally, the TOF Ratio is in near-perfect position. Option investors have steadily moved into calls since put-buying peaked in early March, and the fact that the 21/50 crossover (Buy signal) continues to hold is very encouraging. Stoch (39) shows this has room to run.






On one hand, the lack of institutional buying during this 5-week rally is an important negative. If volume doesn't improve soon, the market will quickly run out of steam.

On the other hand, volume is about the only TA signal that's a real negative. With TA, it's important that something's always wrong. This is TA's version of the wall of worry. Up or down, when every indicator is finally pointing in the same direction, that's usually a sign that things are about to reverse.

My focus this week is on index volume and the Financials. The performance of these two will likely tell the tale for the market short-term.

Longer term...well, May is just around the corner.

I hope your weekend has been fun, and that you have a prodsuctive week.

best

dk

The Big Bounce

The market looked ready to move lower on Thursday, and it did -- for about 30 minutes.

In a remarkable bounce against all manner of economic headwinds, the NASDAQ reversed direction to close at a 7-week high on Thursday. The NYSE confirmed this move and closed at an all-time high, its second record high in three days. NASDAQ volume was even with Wednesday's total, suggesting there was more to the action than just short covering.

On a cautionary note, the IBD100 put in a muted performance on Thursday. Dragged down by the likes of RIMM and MW, it gained just 0.5%. Breadth was just so-so, as 60 of 100 stocks moved up, while just 10 stocks printed record highs. By comparison, on the NDX, 82 of 100 moved up as it gained 0.9%.

After gapping lower at the open, the Composite bounced off its 13-day (dotted line) before heading higher the rest of the day. One of the most interesting features of the daily chart below is the positive MACD divergence. MACD has nearly returned to pre-correction levels, while index price hasn't. This is an uncommon situation, and is typically very bullish. Stochastics reveals that some of the overbought conditions have been worked off as well. Who knows about tomorrow, but tonight this is a good-looking chart.







Since bottoming in mid-March, market internals have been consistently gaining strength. While not flawless, they've steadily improved as the market climbed higher over the past five weeks. This is important, as the market won't go very far without internal, skeletal strength.

Below are three charts that show this progress visually. NASI is a good proxy for A/D (breadth); High-Low charts New High vs. New Lows; and $NAUD measures Up Volume vs. Down Volume. The most important of these is the NASI, and unfortunately it's the weakest of the three. For the record, NYSE breadth is much stronger.











Banks stopped the bleeding on Thursday, but offered little else. For now, the market will take any strength out of the BKX it can muster.







As a follow-up, last night Biotechs and Commodities were mentioned as likely targets for more institutional buying. Biotech and the Drillers did very well on Thursday. The BTK notched a new, 7-year high, and sits just 0.7% below an fresh all-time high. It's a healthy sign that investors seem willing to buy the riskiest part of the market (many of these stocks have no earnings).

In the tech sector, Software is leading the pack, and it also had a solid day. Seeing strength in these three leading groups suggests the current rally has further to go. The BTK, OSX and GSO are all included below.











When Warren speaks, everybody listens, and Buffet's recent interest in railroads has Transports on the move. That's some very nice volume, and the TRAN now sits just 3.1% below a new, all-time high.







The market's rapid about-face on Thursday was an eye-opener that points to more gains ahead. However, tomorrow's Friday, so we'll see.

Until then, have a great evening.

best

dk

Back in the Box

On Wednesday, Wall Street served up a dish that required its own dose of antacids.

If a pre-earnings rally in the midst of an economic slowdown seemed odd to you, Wednesday's action suggests that you weren't so crazy after all. The indexes slid, volume swelled, internals were dreadful and all ten market sectors -- plus bonds -- closed lower.

This is the sign of a market that's re-pricing itself.

How low stocks fall is another thing altogether. The IBD100 fell twice as far as the NASDAQ did on Wednesday, shedding 1.4%. Normally this is a bad sign, and it may ultimately prove to be an important warning shot. However, breadth told a slightly different story.

23 of 100 stocks on the IBD100 moved higher on Wednesday, which sounds low until you consider that on the NDX, just 10 stocks moved up. Also, of the 77 IBD100 losers, only 20 printed distribution days. That's a low ratio for a 2X price move. Leading stocks held up better on Wednesday than one might expect.

IBD100 or not, the Composite slid back into the box on the highest volume in seven sessions. It's also a chart that suggests more downside lays ahead.






The mainstream press says that investors had placed too great an expectation on a rate cut, and today's Fed minutes provided a sobering reality check. Perhaps, but a look at the BKX below makes this generalization very unlikely. The Banks have been weak and struggling to hold their own BECAUSE there wouldn't be a rate cut. The Banks knew -- as did anyone with a TV or an internet connection -- and today's BKX tumble is more likely a comment on earnings. The chart below is also a troubling sign for the broader market.







On Wednesday, investors sold most everything. However, rotation will begin soon enough, and that process creates opportunities. For example, Biotechs caught a bid at the end of the day, and Commodities of all species outperformed as well. Both of these sectors have been leadership groups, and neither are particularly rate-sensitive. Keep an eye of these two groups moving forward.







Two days ago the TOF Ratio triggered a Buy signal. Amidst the selling on Wednesday, option investors flipped to calls, keeping the Buy signal on. This indicator is subject to whiplash, so it will be interesting following its progress in this environment.






As snap has shown us repeatedly, looking at inverted charts can be very revealing. QID does a good job of this, and it's making a decent case for a bull flag. The volume is a popularity contest -- not supply and demand -- and it shows that QID had Sanjaya numbers on Wednesday.





The market's flashing caution signals again. Long or short, just follow the volume and you'll stay ahead of the game.

Until tomorrow, have a great evening.

best

dk

Bullish on Earnings Eve

Ahead of what is forecasted to be a shaky Q1 earnings season, stocks were surprisingly bullish again on Tuesday.

Even though Alcoa beat estimates, the Composite bounced off support and the Dow made it eight-straight, today's real star was the NYSE. The blue chip exchange officially beat everyone back to the top on Tuesday and posted a new, all-time high.

Volume left much to be desired, but the NYSE has managed to reclaim its new high without any MACD divergence. Given the huge momentum swing since Feb 27, that's a very tough trick. It's also a sign that beauty is running more than skin deep.







While the indexes outwardly traded with caution on Tuesday, beneath the surface the market internals were notably bullish yet again. Advancers led Gainers, Up Volume outpaced Down Volume and New Highs dwarfed New Lows, 408-71. That's a ratio of 6-to-1, a remarkable figure given the current economic conditions.

The IBD100 acted similarly. On the outside, the index closed unchanged. However, on the inside, 54 of 100 stocks moved higher, while an impressive 21 stocks hit record highs.

Lethargic price and weak volume are disguising the buying that's actually going on inside. The fact that volume accelerated 7% as the Composite printed an outside day are indications that the buying isn't exactly a well-guarded secret either.






One chart worth a look tonight is the NASDAQ 60-minute. It shows how the index appears poised for more gains.






The Banks continue to hang tough at the 200-day, and now the BKX appears to be printing a diamond. Diamonds are a sign of indecision, and they're tricky. They can either be a reversal pattern (the BKX would move higher), or a continuation pattern (the BKX would move lower). The only thing that's certain is this: once diamonds get this far along, a break is near. The green line at 119 is the old all-time high.






Tech stocks are generally still a mess, but it's important to note that Software remains the best sub-sector thus far. It's just off a new high, which suggests that if you want to own tech, you'll improve your odds by including Software in your search.







Finally, lowrisk.com shows investor sentiment remains firmly Bearish, even though the NASDAQ is up 6.2% off the March bottom and just 2.1% below a 6-year high. This is contrarian bullish, and corroborates the AAII Bull Ratio.






If it seems weird that the indexes appear so bullish while we're in the middle of an economic slowdown, you're not alone. It's a head-scratcher, and reveals that following the ball isn't as easy as it looks. I'm a fair-weather friend of this market, and it's good to know cash is just a few clicks away. However, for now anyway, the weather still looks pretty good.
Until tomorrow, have a great night.

best

dk

What Bonds are Saying

Most investors assume that stocks and bonds move in opposite directions. This is probably because the two have behaved this way for the past 8 years. In truth, stocks and bonds maintain two distinct relationships. When the Fed is active, stocks and bonds compete for liquidity and thus move in opposite directions (yields move in parallel). When the Fed is more dormant, stocks and bonds actually move together.

The 11-year chart below shows these two relationships. The first set of vertical lines on the left mark the last period (1996-1999) that stocks and bonds moved together. As you can see, yields and the SPX formed a giant X from mid-1996 to late 1998. Then, when Greenspan got busy, yields and the SPX began moving in rough parallel, the relationship we still see today.








Below is a zoom-in of the right-hand set of parallel lines from the chart above. The first arrow marks the beginning of the famous "disagreement" between the bond market and the Fed that currently rages on. Once Bernanke paused in late June, bond bulls stormed in and bought the 10-year year ahead of any concrete data that said it was time to do so. The smartest guys in the room stopped following the ball.

Meanwhile, the economy didn't fall off a cliff, 2006 Q3 earnings were good and the SPX kept rising...and rising...and rising. This created the giant X between stocks and yields that you see in the chart below. Finally, in Decemeber, the bond market blinked. Just like this past Friday, bond investors got religion because of a positive employment report (the second arrow). Since then, stocks and yields have resumed their crude, parallel journey.








The chart below shows the 4-year rising trendline that some call, "the recession line". The rule of thumb among many pros is that as long as yields don't tumble below this line, we won't see a recession. Obviously, it appears to have recently survived its most serious test to date.








I'm a big believer in listening to the pundits but trusting the market. This is TOF's famous, "follow the ball." Based on the past 9-months or so, the market has keyed more on jobs than on any other slice of data. Regardless of what the pundits say, the bond market says that as long as America stays gainfully employed, the US is unlikely to tip into recession.

I also think this applies to the Fed as well. Stumbling employment is the likely moment when you'll see Bernanke finally step in and lower rates. Until then, the Fed will likely hang tough.

best

dk

Credit Market Choke Hold

Soaring bond yields put an inescapable choke hold on stock prices Monday. The damage to equities was actually pretty light -- and probably temporary -- but more on that in a minute.

If you think folks on the ^IXIC board don't get along, try visualizing a message board between the Fed and the bond market. Since the Fed paused in June, there's been an unusually nasty feud between these two. When central bankers stop hiking, they're supposed to start cutting, and Bernanke hasn't done this. Making matters worse, there's been an unexpected plot twist.

Bond traders are famous as the best and the brightest, and open markets are incredibly efficient. Together, these two have historically run circles around policy-makers. But not this time. Since pausing in June, the Fed has outplayed the bond market -- hand after bitter hand -- and it happened again on Friday with the jobs report.

Monday's action was really about bonds, so tonight I'm starting with a bond chart. Instead of looking at the 10-year Treasury Yield, the frustration bond investors felt today is best understood looking at the chart below. It's the 10-year Treasury Bond, and it took a big fat dump today. In just two sessions, the 10-year has taken out both its 50- and 200-day. Ouch.

The Fed isn't lowering rates any time soon, but bond investors have stubbornly refused to get on board with this. Which brings up the real problem with the chart below: it needs to fall another 11% to be in sync with the Fed. In Bond World, that's a LOT. Probably because of epic inflows of "dumb" foreign money, bonds have gotten ahead of themselves.






For stocks, the silver lining to "no rate cut" is a decent economy. The Composite took a technical dent today as gave up its opening gap on higher volume. But market internals show a bullish bias remains in place. Even though Decliners edged Advancers, Up Volume outpaced Down Volume on both exchanges, and New Highs crushed New Lows, 463-84.

Adding to the bullish tone, the IBD100 moved up 0.2% as 51 of 100 stocks posted gains. Even more remarkable, a stunning 26 stocks hit record highs today. On the downside, three IBD100 stocks were shredded today on heavy volume.







Oil stocks held up very well today while crude prices tumbled. This divergence is bullish for energy stocks.








As Utilities hit yet another new all-time high despite Monday's higher yields, the Transports responded to lower oil and shot up on strong volume. For fans of Dow Theory, the Utilities, Transports and the INDU are all within 3.3% of all-time highs. The green line on the chart below is the old all-time high.









Finally, even though stocks moved higher last week, the AAII Bull Ratio fell significantly. This is contrarian bullish of course, and is good news for stocks.










Despite more weirdness from Iran and higher yields, stocks continue to hold up. Considering the upcoming earnings season, it will be interesting to see if the lack of selling is liquidity-driven foolishness, or if the market knows something about Q1 earnings.

Have a great evening, and it's nice to be home.

best

dk

A Peek Out of the Box

The chart below shows that the Composite managed to peek out of the box on Thursday.

The light holiday volume creates an important asterisk, but the NASDAQ still closed above 18-week resistance on Thursday. By itself, the 11% slide in volume would virtually negate the significance of this move. However, Thursday's close above 2468 is just one twinkle in a growing constellation of bullish signals.

Not that this makes sense of course. The economy is clearly slowing, and most pros are expecting the coming earnings season to be the worst in 4 years. However, the market appears to be seeing something else, and it's been having these visions for four weeks. Some would even say that it's been having them since mid-July.

One of these visions appears to have been Friday's strong jobs number. Recession hawks have been roosting in the rafters of troubled housing for some time. However, recessions don't happen with 4.4% unemployment, something the yield curve has been telegraphing for over two weeks.

Meanwhile, against a peak in bearish investor sentiment last weekend, the Composite closed higher for six straight days on generally declining volume. If Monday is strong, the market will have pulled off its most famous trick three times in the past month: making a key move with the fewest number of investors participating.

TA is designed to simplify investing decisions, not complicate them. ADX crossed bullish on Thursday, and now five important TA indicators -- MACD, Stoch, ADX, OBV and MFI -- are all confirmed bullish with room to run. Listen to the pundits, but trust the market.







Over the past several weeks, numerous indicators have triggered Buy signals. In addition to the VIX and various EMA systems, there have been heavy volume intraday reversals, the Day 6 follow-through and a steady stream of breakouts on the IBD100.

The following are a variety of other indicators worth a look:

One IT indicator I've been stalking for weeks is the TOF Ratio. It's now poised to trigger a Buy soon, the result of option investors developing a renewed taste for calls. TOF: to simplify things, I'm using the EMA version going forward. As always, thanks again for indulging my interest in your very clever indicator.






Markets are at their healthiest when the riskiest stocks move higher. To monitor risk performance, one of the handiest proxies to use are the Biotechs. The BTK recovered from the Feb 27 correction faster than any other sector, and on Thursday, it closed at a 7-year high. Remarkably, going into an economic slowdown, the BTK now sits just 1.8% below an all-time high. This is another good sign for the broader market.







The Banks continue to hang tough at the 200-day. A resumption of the uptrend in the BKX would be another positive sign for the broader market, probably the most important one of all.





I suspect price volatility will remain elevated as the market digests an uneven earnings season. However, overall the market looks good moving forward. As always, how successful you are depends largely on what stocks you own.

Have a great Easter weekend. I'm looking forward to going home on Sunday.

best

dk

The Quiet Bull

The gains were small as volume slipped 11%, but a bullish bias to the market remains in place.

The most obvious example of the market's new mood is how it looked past two weak economic reports Wednesday morning. Even though Service and Factory data were particularly lame, sellers were few. Up Volume beat Down Volume 2-to-1, and New Highs outpaced New Lows 387-58. For now anyway, the market appears to have already discounted some bad news.

It's also encouraging to see the IBD100 continue to chug along. On a so-so day for the broader market, leading stocks put in a solid showing on Wednesday. The IBD100 gained 0.6% as 63 of 100 stocks moved higher. More importantly, a hefty 21 stocks on the index notched record highs. As we've noticed throughout this 3-week rally, the IBD100 isn't signaling the end is near.

The Composite closed above the March 21 follow-through day on Wednesday. That's a good sign. Even though the volume was light, the market held on to its gains. That's another good sign. Finally, I'm seeing a large number of stocks continuing to set up across a broad range of sectors, while the various indicators on the chart below suggest more gains ahead.





It's been a long day and I need to cut it short, but on the eve of a holiday, I doubt there'll be much heavy lifting on Thursday. Since an important employment report comes out on Friday while the market are closed, it would be unsurprising to see investors take some off the table tomorrow, but you never know.

Until then, have a great evening.

best

dk

Stocks Surprise to the Upside

A little good news went a long way today.

For the past three days, the Composite has gapped higher at the open, only to fade and eventually close unchanged. On Tuesday the NASDAQ did it again, gapping higher at the open for a fourth straight day. However, this time the gains held. Stocks rallied broadly higher as volume surged 13%.

Monday offered some important signs that change was brewing. Monday was a long travel day for me, but on a layover in Dallas, I saw TOF had picked up on something unusual that I had noticed just moments earlier.

By early Monday afternoon, the indexes were fading once again. However, this time option investors were buying calls like crazy. I checked the IBD100, and it was up 0.9% as 72 of 100 stocks were printing gains. Also, NYSE internals were overwhelming positive. Beneath Monday's index sag, a stealth rally was underway.

That rally broke out into the open on Tuesday. All of the indexes are now back above their 50-days, and market internals were very strong. 3 of every 4 shares traded on Tuesday was a Buy, and New Highs clobbered New Lows 468-83.

The IBD100 added 1.1% on Tuesday as 72 of 100 stocks closed higher. It's worth noting that Jonah Keri at Investors Business Daily was disappointed that the IBD100 didn't do better. It barely kept up with the SPX and was beaten by the NASDAQ. Considering the current rally has seen very few heavy-volume updays, this is worth keeping an eye on.

The NASDAQ needs to break out of this box, but today's action was a vivid technical improvement. All of the indicators suggest that stocks have room to run.






As we mull over prospects for the economy, copper continues to give strong signals that things are better than many suspect. It's up 39% off the Feb low. Over the next several months, it will be interesting to learn what this oft-cited leading indicator was really saying.





Rattled by the mortgage fiasco and a stubborn Fed, Financials are now 5 weeks into some heavy volatility. That said, the BKX continues to fight hard at its 200-day. If the Banks can avoid the dreaded 50-day Death Cross, the IT uptrend remains intact and the broader market stands a chance at fully recovering.






Hats off to you Snap, as I think your Up/Down Sentiment Poll is a great idea. I suggest to everyone that we run this poll just as Snap has set it up. It's simple and worth a serious beta trial. For the record, midweek revisions defeat the purpose of a weekly poll. You can always change how you trade, but leave your vote as is. It's most valuable in advance of the action.

Sentiment polls are useful for their contrarian value. Like the Snap Poll, Lowrisk.com's poll flipped strongly bearish this weekend. As has happened with each bearish reading at this level, stocks rallied shortly thereafter. It will be interesting to see how the Snap Poll, lowrisk.com and the market correlate going forward. I know I voted "Down", and with two trading days left, my vote will likely become yet another contrarian statistic.






The tightly-wound market surprised many and broke to the upside today. The fundamental picture is pretty dicey, so Tuesday's action was an impressive eye-opener. However, the markets are hardly out-of-the-woods. For the current rally to truly bear fruit, four important things (among dozens of others) must happen:

1. The market must continue shaking off bad news. Earnings season will provide lots of opportunities for this.
2. The Financials must participate.
3. Leading stocks need to consistently outperform the broader market.
4. Market internals -- advancers, buy volume and new highs -- must stay strong.

The headwinds are strong, but the stakes shifted on Tuesday. The rest of the week should be interesting.

Until then, have a great evening.

best

dk

Apple and the Beatles

This is hardly a cure for what ails the markets, but it's good news for Apple, EMI and music-lovers everywhere.

In a long-rumored development, it appears EMI is finally ready to announce a deal with Apple concerning distribution of the Beatles catalog, most likely through iTunes.

I own AAPL and use their products, so this has a special twang for me.

best

dk

Q1 2007 Results

It's hard to call someone a cowboy if you've never seen him ride.

Below is a Q1 2007 performance chart of my real-life trading portfolio. It's an Etrade screen capture: the green line is my account, and the blue is the SPX. The only modification I've made to this chart is to blur the account number.

A choppy Feb told me something was amiss, so I was able to dodge the brunt of the Feb 27 selloff and stalk the bounce with decent success. Nothing's ever perfect, but all things considered, I have few complaints.

For specific stock picks, I maintain a running Recommend List over at Clearstation. Caveat Emptor: for various reasons, this Rec List is rarely 100% accurate. It contains lots of stocks I don't currently own at this time, while a few stocks I do own may not be on the list.

best

dk