New NASDAQ High

The NASDAQ gapped to a new 6-year high on Thursday and then stood its ground, a fitting end to an unusually strong May.

Just five sessions ago, the market stood at the brink of disaster. Even worse, it was the third time in May that the market had been there . Each time, just as the market seemed ready to fall apart, buyers stepped in to push the market to a new record high. The green arrows on the chart below shows this string of higher lows and higher highs, ending with Thursday's close above 2600 for the first time since Feb 2001.

A remarkable bid remains under this market, and three times it averted what could have been a terrible month. It's a reminder that TA graphs the forces of FA, and not the other way around. The three "failed" bearish formations are evidence that if investors want to buy (or sell!), it doesn't really matter what the charts look like.

Speaking of fundamentals, while the broader markets were mixed on Thursday, leading stocks rallied hard. The IBD100 gained 0.9% as a whopping 31 of 100 stocks hit record highs. This was the 4th straight day the IBD100 has outpaced the broader market, positive divergence that is usually very bullish for stocks.

The market internals are sending a similar message (see charts). May's three bearish threats took a toll on the internals, but most of that damage has been repaired.

The MACD divergence is the weakest link on the chart below. However, it's also printing a positive crossover, indicating momentum is accelerating again. If the buying is sustained, MACD can heal itself.







Since bottoming in Jul 2006, the NASDAQ has been been up 8 of the past 10 months, and is finally pushing the Bollinger envelope open. Volume has been stronger on up-months, and all of the technical indicators suggest more gains ahead.







A look at the subindexes shows important strength in critical areas.

--- The Transports hit an all time high on Thursday, as did the Brokers and the Cyclical Index.

--- Technology continues to flash important signals. Tech bears tend to focus on the SOX weakness, while ignoring the more important broader strength. For example, the Tech Index hit a record high on Thursday, as did Internet, Software, Networking and Telecom. In fact, Hardware and Semis are the only two tech subindexes NOT at record highs.

--- The Retail Index refuses to give up. It's climbing the right side of what appears to be a constructive base, and sits just 1.8% below an new all-time high.

Maybe not on Friday, but all of this suggests more gains ahead for stocks.

best

dk

Shaking Off the Dragon

It's been very hectic this week, but I wanted to drop a quick post about the past two sessions.

The most bullish thing a market can do is to keep going higher. The second most bullish thing is to keep going higher while few people expect it. Stocks have pulled off a pair of low-probability upmoves this week that caught many by surprise. The odds were low because these moves required overcoming distribution days, divergence, bearish candles, poor sentiment, crappy internals, a stall in money flow and a surge in put buying.

It has also required ignoring weakness in the Chinese stock market. The Feb 27 Shanghai selloff rattled markets worldwide, and triggered a correction in US stocks. However, the next two Chinese selloffs in Apr and on Wednesday drew a yawn from US investors.

There appears to be some recognition that while the Chinese markets are correcting, the economy itself remains quite robust. This reaction is rational, encouraging and gives a fresh twist to that uniquely American expression: it's the economy, stupid.

As always, the most intriguing aspects of market action are often the imperfections. In this case, low volume is the elephant at the table. The NASDAQ tacked on 55 points in the past 3 sessions on volume 13% below average. Stocks are higher in part because of short covering.

However, market internals show that there's more to it than that. Breadth has improved, and both Up Volume and New Highs have accelerated. Also, the IBD100 has continued to outperform. It had one day of downside outperformance last week (the IBD100 version of a distribution day), but since then, it's outpaced the broader market higher.

The bears were unable to follow-through on last week's selloff, and the Composite is now parked just 0.3% below a 6-year high. Despite the light volume, various technical indicators have improved: MACD crossed over on Wednesday, Stochastics printed a higher low, and OBV has stayed positive.







TOF made a couple of great observations in Tuesday's Old Fool Notes: when you try to write an obituary for this market, the words won't stick to the page; and the TOF Ratio still hasn't flashed a Sell.

My casual observation about the TOF Ratio is that the Sell signal is generated by the second 21-day/50-day crossover. The first 21-day touch (orange arrow) usually works as a warning, and stocks continue higher for a while. However, the second crossover (red arrow) is one to heed.





Market action suggests that investors are focused more on this week's economic reports than they are on the overseas markets. Record highs on the SPX, Dow, WLSH, MID, RUT and NYSE point to a market expecting few surprises in these reports.

Should something unexpectedly negative appear, the bears will likely get another crack at pushing the market lower.

best

dk

Memorial Day Bounce

Friday's action was little more than a shallow, pre-holiday bounce.

Its most significant accomplishment was to delay any further decisions about the current pullback. Recent declines in various technical indicators -- the TOF Ratio, IBD100, MACD, OBV, Money Flow, etc. -- were suspended by Friday's low-volume rebound. The "strength" changed nothing, and stocks remain in pullback mode.

How deep and long this weakness lasts is impossible to know. The market flashed wobbles the entire month of May, making this downdraft probably the worst-kept secret on Wall Street. What effect this obviousness has on the pullback will be an interesting subplot to follow.

As price slides, it's important to note that fundamentally very little has changed. Bond yields climbed, but rates moving back towards 11-month-old Fed policy is hardly surprising. Greenspan and China? All Greenspan did was to say out loud what prudent investors suspect to be true anyway. Housing, jobs, manufacturing, the consumer -- recent data contained few genuine surprises in either direction.

Technically however, there are lots of reasons to sell. Finally at an all-time high, the SPX chose an ideal spot to pull back into a handle-like reassessment. The NASDAQ halting at 2600 has program trading written all over it. The NYSE is above the upper boundary of a 3-year channel. The thing about technical moves -- up or down -- is that they generally don't last long. Technical weirdness gets its business done and the trend resumes. Fundamental weirdness takes much, much longer.

The IBD100 and market internals were very strong on Friday, but the light volume rendered the action essentially meaningless. In the world of TA, the low-volume inside day on the chart below is like a day that never happened. The market could climb near-term, but TA says that it's a low probability move.








For the bulls, the most promising chart continues to be the Composite weekly. The weekly chart shows consolidation, not collapse, and the key tell is 3 weeks of stable price closes on lower volume. Price has been volatile, but it held at the 10-week and all of the technical indicators remain in good shape.









Thursday's 16.2% New-Home Sales pop caused quite a stir this week, but the big sales jump wasn't the most provocative part of the report. The fact that New-Home prices fell 11.2% -- the largest one-month tumble on record -- was the more critical development.

I've described before how economics teaches that price cuts are the final, painful step to a housing recovery. At long last, the builders are throwing in the towel, and it's these bargains that are stimulating demand. Unfortunately, this will also be the most excruciating part of the cycle for the builders as they finally book their losses.

The unfortunate part is that even with the New-Home price plunge, the housing debacle is far from over. New-Home sales are just 15% of the housing market. Existing-Home Sales are the real problem, and there isn't any evidence that sellers are ready to cave in and drop their asking prices. Watch for that. It will have a regional bias, but when existing home prices decline it will generate negative press. However, it will be the best bad news the housing market will ever receive.

Should the 50% retracement hold on the chart below, the 2005-2008 housing recession will go down as a moderate one. I suspect the HGX will likely break to new highs at the precise moment that the builders flip economically positive.








Utilities require lots of capital and their revenues are regulated. This makes them very vulnerable to higher rates, and the Treasury yield rally has finally hit the Utes hard. After a fantastic run (40% in 13 months), they appear to have begun work on a new base. Unless the sweet divs are critical to your plan, it's not a bad time to take a little off table.







The Transports -- like the Composite weekly -- continue to make the case that the current pullback will be minor. The bullish ascending triangle consolidation continues -- for now anyway. Note that CCI(20) has slipped below 100, a sign of weakness.






Short-term, the market is in the throes of consolidation. This means up, down and sideways, with the bias being down. It's very tricky to trade, and you should have an investment profile that feels comfortable.

Based on multiple indicators, the odds suggest the current chop lasting for weeks, maybe even months. The market action won't be all down, but if the action feels gut-churning to you, it may be a sign that you have too much risk exposure.

Hope you're having a great Memorial Day weekend. I have a brother-in-law who's an Air Force Colonel in Afghanistan, and my thoughts and prayers are with him. He isn't due back stateside until July 2008, but that's why he gets paid the big bucks.

For any Travel Put fans, I'm flying on Tuesday morning. :)

best

dk

The Selling Hits

It's just a coincidence of course, but whenever I travel, it always seems that the market goes down. I 'm so used to seeing red while sitting in airports, that I even gave it a name:

The Travel Put.

Thursday extended the Travel Put streak, as stocks fell on a big jump in volume. The action inflicted significant technical damage, and with just a little more follow-through, it could be the unmistakable start of the Summertime Blues.

As the indexes fall towards support, the real problem is that the trifecta of secondary indicators I follow are weakening even faster.

First, the IBD100 had a bad day. It tumbled 2.2% -- farther than the broader market -- and a whopping 92 of 100 stocks closed lower. Even worse, the selling accelerated sharply, as 36 stocks printed distribution days. That's a big number, and is not a good sign on such a big price move.

Second, the market internals were lousy, and charts of the internals show that the weakness is picking up steam. The most troubling is the NASI, which has been struggling since the Feb selloff. NASI put in a lower low in March, and is now threatening to go even lower.

Third, the TOF Ratio is poised to print a Sell, as option investors have shifted to puts.

The chart below shows five key support levels for the NASDAQ. When the fundamental leadership, market internals and option metrics are all unanimous in their weakness, price support tends to be more porous. Also, none of the technical indicators offer much promise either, and the odds clearly favor lower prices.






There was nowhere to hide on Thursday, as investors sold everything -- stocks, bonds, cyclicals, defensive, commodities, energy and precious metals. In fact, all 32 subindexes I follow closed lower. This is the unusual sign of a market being re-priced, and no hint of rotation was visible anywhere. It's ugly, though generally it's not a sustainable situation.

It's a great time to work on watchlists, paying particular attention to stocks which avoid the selling. Even more, it's definitely the time to be patient. Beware the Siren song of the first bounce. It will look seductive, but statistically most investors do better just strapping themselves to the mast and gritting it out.

Until tomorrow, have a great evening.

best

dk

The Greenspan Put

Marketwatch posted a representative headline on Wednesday:

Stocks end lower after Greenspan's China comment. Let's listen in...

"...and they have this really cool flag with these five yellow stars..."

Regarded by many as financial America's crazy Uncle Al, Greenspan got blamed for yet another market event on Wednesday. The only problem is that the actual selling pressure started almost an hour after his comments hit the wire.

The mainstream press needs a "reason" for things, but observant investors know that Wednesday's reversal likely has its roots elsewhere. Distribution days, a wobbly TOF Ratio, negative MACD divergence and almost a million consecutive up days all point to a market in search of a rest.

As some lace up their grave-dancing shoes, it's worth noting that the sellers have their work cut out for them. While there's record short interest, massive option hedging, and a ProShares feeding frenzy, the IBD100 still isn't attracting any sellers. The IBD100 slipped the same as the NDX on Wednesday, but its breadth was better and it had 16 record highs. Most surprising of all, just 15 stocks printed distribution days. Within the fundamental leadership, the selling isn't off to a very good start. Of course, that can change very quickly.

Market internals were actually quite strong before the market reversed. Afterward, they were negative of course, but hardly lopsided. On a reversal day, New Highs still swamped New Lows, 483-81.

The market has given plenty of warnings to adjust risk to taste. Wednesday was the 4th distribution day in three weeks, MACD has diverged, stochastics are overbought, and that's a nasty-looking red candle. However, volume picked up just 4% after tracking much stronger earlier in the day. When the selling started, volume backed off.

Considering the Composite failed at exactly 2600, technical selling accounts for some of Wednesday's move. What happens next is impossible to know, but the chart below is certainly a wobbly piece of business.







The bond market is finally throwing in the towel. Despite a housing and auto recession, the conditions for a rate cut simply aren't there. Both the FOMC and the stock market have consistently indicated this since summer 2006, but until recently, bond investors were unconvinced.

Greenspan wasn't alone on Wednesday, as rising rates were also blamed for the selloff. Maybe so, but the chart below shows that rising rates -- like the inevitable destiny of the Chinese stock market -- are a surprise to no one (the Banks certainly weren't surprised). Unless unemployment rises, rates will continue to meander towards 5.25%, and some of that bond money will eventually flow into the stock market.







There's no way to know how much selling lays ahead. Technically, the market has been flashing a variety of warning signs, and if you aren't in your comfort zone by now, you could be in for a bumpy ride. Tomorrow and Friday see manufacturing and housing data, which sometimes moves the market and sometimes not.

Keep an eye on the fundamental leadership and the volume, and your odds of success are greatly increased. Watching the TOF Ratio doesn't hurt either.

I'm traveling tomorrow through June 3(?). See you from the road.

best

dk

Split Personality

Tuesday was a Tale of Two Markets. On one hand, things looked OK; but every positive had an evil twin.

The NASDAQ and RUT ticked higher again, while the Dow edged lower for the second straight day. Market internals were strong again, but the overall volume continued to be lame. The IBD100 had strong internals, but it closed flat on the day.

However, the bigger problem was the TOF Ratio, and it had no upbeat doppelganger. Not only is short interest currently at record highs, on Tuesday option investors poured into puts. The CPC spiked higher, and as a result, the TOF Ratio is the worst it has looked in two months. It's hardly a Sell, but you can see one from here.







The May pullback cost the Composite momentum, and the recent tepid gains have resulted in negative MACD divergence. Continued climbing heals divergence, but after three days of wimpy volume, the Composite now appears suspect. The NASDAQ has climbed 60 points in 5 days of below-average volume. This suggests short-covering, rather than bona fide accumulation.








No market goes up every day, and this rally has had more than its fair share of up days. The past two weeks have seen a crop of distribution days and two giant call spikes on the TOF Ratio. Should the inevitable selling pressure arrive, the bigger question is how much downside momentum will it gather?

One thing missing from the Feb 27 selloff was a collapse of the IBD100. The rapid bounce-back was hinted at early because the fundamental leadership simply fell in sync with the broader market.

In contrast, May, 2006 was a very different experience. On several days, the NASDAQ fell 1.8%+ while the IBD100 tumbled a whopping 4.8% as 97 of 100 stocks closed lower! If the market is going to see a real, full-bore summer correction, the IBD100 will be among the first to let everyone know.

For now, the IBD100 looks good, as do a majority of stocks within the broader indexes. However, good looks can change easily. The market is waiting for Thursday and Friday's manufacturing and housing data. Until then, the catalysts are largely "who-bought-who".

Up or down, long or short, the simplest advice is to follow the volume. In price there is knowledge, but in volume there is truth.

Until tomorrow, have a great evening.

best

dk

Top 30 Financial Blogs

Are you reading the right stuff?

Alexa.com is a web information resource that -- among other things -- ranks websites by their traffic data.

Below is the May 2007 Alexa rankings I compiled of 30 popular financial blogs. The ranking is measured against all US websites in the Alexa universe, blogs or otherwise.

For this list, I excluded the huge financial behemoths, and to make the cut, each blog had to be ranked in the top 1,000,000 most popular US websites. Links to most of these blogs are included further down on this page, under Links.

This list is fascinating evidence that quality content virally finds its own audience. Congrats to all the winners, and happy reading.

best

dk

The RUT Steals the Show

The Bataan Deadline March continues for me, although it's pencils down on Wednesday evening. Thursday morning I leave for about 10 days on the road (return isn't booked -- not my favorite). It's revealing that I'm looking forward to hitting the road so I can get some rest.

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Stocks took off higher on Monday, but the tepid volume proved no match for afternoon selling pressure. All of the indexes closed off their highs, and the Dow even - gasp -- closed down for like the first day in 5 years.

While the index wicks look a little disturbing, it's important to note that the fundamental leadership had an outstanding day on Monday. The IBD100 gained 1.5% as 78 of 100 stocks moved higher. Also, an eye-popping 36 stocks printed record highs. The market internals were superb again as well, and a look at the charts shows noticeable improvement. Throw in a decent TOF Ratio, and it's probably still a little early for grave dancing.

As the mainstream press hung on every SPX tick, the more interesting story on Monday was the RUT. Just when we thought small-caps were trés passé, the RUT quietly turned in Monday's best performance and even notched a new, all-time high. The SML showed that the move was for real, as small-caps saw the strongest volume of all of the indexes on Monday. Going forward, it will be interesting to see if the small caps can follow-through. If the broad rally is to continue, it's a necessity.

The volume sag is about the only thing not to like about the Composite tonight. The 6-year high on climbing Money Flow is a positive sign, and ADX is starting to curl upwards.






In addition to being a great investment tool, QID also offers a front row seat to investor sentiment. Since QID price is determined solely by NDX derivatives, buyers and sellers have zero effect on price in the chart below. Heavy QID volume isn't "exhaustion" or "bottoming" or any of the other supply-and-demand signals seen in traditional securities.

From a sentiment perspective, the volume you see is actually a revealing type of investor "vote". The voting has been ferocious lately, and the bigger question is whether or not it has contrarian value.

In the past two weeks, QID has set 4 of its 7 highest volume days ever. Monday's 32 million shares set a new all-time record, a clear sign that institutional investors are hedging with QID. The real winner: ProShares.







The indexes look a bit stretched, but the fundamental leadership continues to look strong. While markets change quickly, they usually throw off important warning signs before the Big One. For now, none of the familiar mayday signals are evident just yet, but tomorrow is a new day.

Until then have a great evening.

best

dk

XAU:GOLD in Sync with the US Dollar?

The XAU:GOLD ratio is one of the classic buy/sell timing indicators for precious metals. The Gold Ratio is a blunt instrument, but significant ratio lows -- usually below 0.2 -- suggest a new PM buying cycle is near.

The Gold Ratio also has a long history of maintaining an inverse relationship with the US Dollar. A representative sampling of this is the 6-year period from 1995-2001.







However, in late 2004, something very unusual happened: the Gold Ratio and the US Dollar began moving in parallel. Anything "gold" moving in parallel with a fiat currency is every goldbug's worst nightmare, and unfortunately it's a condition that persists to this day.








Over the past three years, gold's de-correlation with other asset classes has seriously waned. It's even affected gold's most prized role as an inflation hedge. On numerous occasions (most recently May 11), the stock market tumbled on inflation fears -- but gold fell even harder. On May 11, the XAU was actually the worst performing sector.

Perhaps the most infamous de-correlation snafu in recent memory is gold's massive tumble during the May 2006 stock market correction. While the SPX pulled back 8%, gold fell 26%. The irony is that equities corrected in May 2006 in part because of the effects of hefty inflation on Fed policy. The SPX is now 15% above the May 2006 high, while gold is still 9% below, even though inflation remains stubbornly high and the US Dollar has fallen over 7%!

Some in the financial community contend that this unusual behavior is evidence that the price of gold is being manipulated. As the theory goes, the world's central banks are conspiring to keep the price of gold low to create the appearance of low inflation and provide fiat currency support. Another reason suggested for the XAU's odd behavior is that the miners are so heavily hedged that they can't benefit from gold demand.

Regardless, the only thing more interesting than watching the Gold Ratio parallel the US Dollar is to watch for the market force that will eventually wrench the two apart once more.

best

dk

Positive Signs?

I'm still under the gun with work. One project is (finally) done; a second is due Wednesday. Working straight through the weekend.

The market stepped up to the plate on Friday and made key technical improvements. On balance, the NASDAQ looks ready for more gains, and the week before Memorial Day has a tendency for strength.

Market internals were much stronger on Friday, but a look at the charts is a sobering reminder of the wobble that lurks within. That said, the weak internals also have a logical explanation: small-cap selling. The NASDAQ contains a huge number of small- and mid-cap stocks. As a result, this majority can be weak while the (cap-weighted) index hangs in there, and even moves higher. Regardless, no market makes a sustained push without internal health.

Both the IBD100 and the TOF Ratio continue to show no unusual signs of wear. On Friday, the IBD100 outpaced the market with a 1.2% gain as 72 of 100 stocks moved higher. Also, 14 stocks hit new highs, up from Thursday's 9. The TOF Ratio suffered a pair of nasty spikes two weeks ago, but has since calmed down and is in ideal position for another market up move.

The Composite closed at the highs of the day on an uptick in volume. Money Flow refuses to go below 50 even on pullbacks, and Stochastics are headed higher. The curiosity is ADX. Typically, when it slides down to 10, an acceleration in trend is near. However, as late Feb shows, that acceleration could also be to the downside.







The weekly NASDAQ chart presents one of the best technical arguments for a pop to the upside. For three consecutive weeks, the Composite has printed weekly hammers as buyers scooped up any shares that fell to the floor. The punch line is that now the buyers stepped in at the 10-week line. Higher volume shows the institutions at work, and don't let the fractional loss distract you from noticing the accumulation that actually went on this past week.








The Banks continue to make good on their improvement. MACD looks lousy, but consolidation is brutal on momentum indicators.







Another important "lifeblood" chart are the Transports. The TRAN is printing a bullish ascending triangle and notched another new, all-time high this week.







The 10-year Treasury Yield broke out to a 4-month high on Friday. As most of you know, I've been fascinated by how the normally hyper-accurate bond market has been so consistently wrong about the economy for over a year. The distortion likely has its roots in the huge influx of "dumb" foreign money into Treasuries. Regardless, the bond market continues to come to its senses, slowly but surely.

While rising yields can be a problem for the stock market, all the 10-year is doing is moving towards the (historically low) Fed Funds rate. At 4.8%, the 10-year yield is an eye-popping 9.2% lower than the Fed! In Bond World, that's an unusually large gap.

Is this a problem for equities? The most reliable answers come from the market itself. The Banks had an up week, Utilities hit a new all-time high, both Retail and the Housing Index closed above their 50-day and the yield curve is positive again. Gasoline may be a problem near-term, but 5.25% appears baked into the cake.








Finally, does QID "voting" have any usefulness as a contrarian indicator? Convinced that the market had nowhere to go but down, Tuesday saw the second highest QID volume ever as buyers dove in headfirst. However, the extreme level of activity may have marked a short-term bottom for the NDX.

Notice as well that Wednesday was the third-heaviest volume day ever, as many investors apparently felt a touch of buyer's remorse.











The two-week correction appears to be giving way once again to the more predominant IT uptrend. The market needs confirmation, but looking through a wide watch list of stocks continues to show a lot of strength. Like Dow 13,000, the looming SPX record is another one of those sentiment magnets.

That said, recognizing the trend is very different from being careless. For starters, you've got to be very selective with what you're buying. This market is very unforgiving if you're in the wrong spot. Even worse, the market is eventually going to correct and make a lot of investors miserable.

Until then, if you want to consistently outperform the broader market, you've got to follow the ball. Buying and selling on volume remains one of the best short-hand tools at your disposal. Fortunately, this market has stayed very "volume-rational" with individual stocks. I've had excellent success holding positions that droop on low trade, and bailing on those that show distribution. This is a very good sign.

Until Monday, have a great weekend.

best

dk

Rotting Internals

I'm still on the chain gang tonight.

On the bright side, Thursday saw a pullback on low volume. The IBD100 slipped the same amount as the NASDAQ, and IBD100 breadth was 50% better than the NDX. The Banks, Cyclicals, Energy, Transports and Tech stocks all continue to look OK, and the TOF Ratio is steady.

However, I'm not a fan of the continuously weakening internals. A big part of it is the rotation out of small-cap stocks. However, without breadth, up volume and new highs, markets rot from the inside and eventually fall apart.

Dr. Brett calls the recent action a stealth correction. His Market Notes for a Thursday looks at it from the TRIN perspective, and he makes the point that the weakness is becoming "less stealthy" all the time. Not my favorite.

Rotting internals also means that your stockpicking skills are more important than ever. There's no tide out there to help raise a leaky boat.

I should have time over the weekend for a more detailed post. Hope everyone's doing well, and until then, have a great evening.

best

dk

Oversold bull flag? Bearish rounded top? Who knows? but at least it was a low-volume inside day.

Bounce Back - Part One

I am totally crunched on a deadline tonight, so I need to be brief.

Until institutional investors dump the fundamental leadership, any pullback can -- and usually will -- have upside surprises. Wednesday was a perfect example of this, and important clues were visible on Tuesday.

Tuesday was very distracting, with noisy, high-volume selling and awful internals. The market took a big technical hit, yet despite this, there was no selling on the IBD100. This was very odd, and an unexpected show of strength. Also, the TOF Ratio was stable, which meant that option investors kept their cool. This is always better than the alternative.

So -- somewhat unsurprisingly -- the buyers returned on Wednesday, and the market (thankfully) had a solid day from the inside out. Volume was strong, the market internals were excellent and the IBD100 did well.

That said, this market is still on bed rest. It needs follow-through on big volume -- and several days of it -- to correct the recent technical damage. The pullback has been messy, and it's left the indexes with serious internal injuries. Without follow-through, the market will simply print a dangerous, lower high, then roll over for a more serious summertime tumble.

It's important to understand that the charts also suggest that the market can still heal itself, if only for an intermediate push. The Banks were up sharply, as were the Dow Theory Triptych -- the Dow, Transports and Utilities -- and the Tech Ratio continued its climb. Overall, stocks with strong fundamentals are doing fine, and the IBD100 looks in very good shape. In addition to charts, there are contrarian reasons, yield curve reasons, commodity reasons, currency reasons and bond market reasons supporting the market as well.

Also, and perhaps the biggest reason of all, the SPX is now less than 1% away from an all-time high. It's easy to make apples-to-oranges excuses for the (price-weighted) Dow's all-time record highs. However, the (market-cap weighted) SPX is a much tougher index to say, "yeah, but...".

It may not be tomorrow, but the market looks like it eventually is going to move higher.

Until tomorrow, have a great evening.

best

dk

The Composite is almost oversold, yet it's just 1.2% off a six-year high.

Selling Picks Up

On their website, CNBC summed up Tuesday's action with:

Dow Closes At Record High on Tame Inflation Data.

Well, I guess that's one way to look at it.

Another way to see it is that sellers are finally gaining downside traction on strong volume. The Composite printed its 3rd distribution day in the past 4 sessions, which is more like the May that most investors were expecting. Also, the intraday rhythm has shifted, from morning selloffs that reverse to higher closes, to morning rallies that end in selloffs. Market internals continue to be very weak.

That said, up or down, the market never sends perfect signals. Amid the weakness, an important divergence continues to be the IBD100. It fell 1.1%, a little worse than the RUT's 1% decline. However, breadth -- once again -- was better than the broader market, especially the NDX. 33 stocks on the IBD100 closed higher vs. just 17 on the NDX. Also, 15 stocks on the IBD100 hit new highs.

However, the real kicker with the IBD100 continues to be the pronounced lack of selling pressure. Expecting pure carnage, I was surprised to find that only 15 stocks on the IBD100 printed distribution days on Tuesday. That's one less than on Monday! For whatever reason, institutional investors aren't dumping the fundamental leadership. Unless the IBD100 sees heavy selling, it's unlikely the market will see a repeat of May 2006.

Technicals are deteriorating rapidly, while price hasn't even tested significant support at the 50-day or Fib 62. This means that the odds favor it gets worse before it gets better. However, this is OE, so who knows?








At the end of April, scduo4fun posted a link to a great chart by Mike Paulenoff at mptrader.com. Paulenoff said that when the DIA:IWM ratio cracked 1.64, a tectonic shift towards large cap stocks had been confirmed. That confirmation happened today.

What does this mean? Well, large caps historically lead at the end of bull cycles (a period that can last a long time FYI). Also, when you shop, think big. For example, on Tuesday just 1 in 3 stocks closed higher. However, on the OEX, 50 of 100 stocks closed up. The chart below is saying that, statistically, size now matters.








QID volume doesn't drive QID price, but functions more like daily voting machine. On Tuesday, QID saw its 2nd highest volume ever! The public has spoken, now let's just hope it hasn't learned to speak contrarian.








The TOF Ratio -- like the IBD100 -- continues to hold up well. For now, Atlanta isn't burning, but the battle is young.









If you follow the ball, you follow it wherever it leads you. In case you haven't noticed, it's leading you down right now. Corrections, like rallies, tend to be very unpredictable, especially when they're counter to the primary trend -- like this correction.

Until the IBD100 and TOF Ratio start falling apart (which could be tomorrow!), this market probably has a few upside surprises ahead.

Expect the unexpected, and adjust risk to taste.

best

dk

The Other 66%

Even though last week Alan Greenspan reiterated his "33% chance" of a US recession, the market itself continues to weigh in that the chances are far less.

Since recession talk began ramping up in summer 2006, the market has consistently been sending a very different message. For example, since the July low, the NASDAQ is now up an impressive 27%. Below are two charts that reinforce the message of the markets, and place recession odds far lower than even 33%.

It's only an intraday print, but the peskier 3-month/10-year Yield Curve as now back at even, and Cyclicals don't rally in the face of bona fide recession risk.

best

dk

A Grumpy Market

Even on a down day, Monday showed how difficult it's been for sellers to gain control of this market.

Composite volume picked up 12%, technically making this the second distribution day in three days. However, the market closed well off its lows and trade was below average. Not exactly decisive selling.

Market internals were horrendous yet again, and a look at the charts shows that the rally is weakening from the inside out. Not my favorite.

However, both the IBD100 and the TOF Ratio are showing no signs of imminent disaster. The IBD100 slipped in line at 0.5%, while breadth was actually better than the broader market. 40 of 100 stocks on the IBD100 moved higher, while just 27 stocks on the NDX posted gains. Also, the selling was pretty light, as just 16 stocks printed distribution days. Since IBD100 volume was so light on Friday, this makes today's sell stat particularly unimpressive.

Bottom line, the market action suggests it's not about the technicals -- it's about this week's economic data: Tuesday's CPI and manufacturing numbers, then the housing and employment reports later in the week. OE is another consideration, but OE volatility has been virtually non-existsent for a while. Charles Kirk quotes Jason Goepfert that 9 of the past 10 OE's have closed positively for the week (OE Friday closed higher than the preceding Friday).

The chart below looks weak, but not one stock I own saw heavy selling on Monday. As I mentioned on Saturday, the market is not in the mood for a strong CPI report. Should inflation come in a bit hot, expect fireworks to the downside.

I'm in the middle of deadline hell, so posting could be a bit erratic this week.

Until then, have a great evening.

best

dk

Because of the calculation method, stochastics will likely fall to near 20 on Tuesday. However, all the sellers have to show for growing oversold is a 1.3% slide. The Composite has a rounded top, but for now it's only consolidation. The uptrend remains in tact, though by 8:31am tomorrow, it may be a different story.

Energy Selects

I generally avoid posting specific stock ideas, but a look through the energy space this weekend shows a number of highly-rated companies poised for moves higher. Regardless of the price of crude, energy stocks are on the move.

Here's a link to Ten Energy Selects that are in decent technical setups. Everyone has their favorites, so if yours isn't here it means nothing. In addition to good setups, each of these sports excellent fundamentals.




They're arranged in groups:

Coal -- ACI, CNX
Solar -- SPWR
Equipment - CAM, NOV
Offshore -- RIG, OII
Drillers -- DNR, UPL, NE

best

dk

CNBC Million Dollar Portfolio Challenge

I managed to close in the top 5% in the CNBC Million Dollar Portfolio Challenge.

Having no edge with the "put it all on black" approach needed to actually win the game (and lacking Bill Luby's superb volatility tactics), I decided instead to see how my real-life approach would measure up.

I started with 15 stocks, then kept whittling down the list, selling the laggards and plumping the winners. Almost all were stocks in my real-life portfolio. I rose to the top 5% early on -- when it was only about 250,000 participants -- and then drifted between 4-7% for the rest of the contest. My big winners were AAPL and CELG.

Unfortunately, I was very undisciplined about the Bonus Bucks thang, and remembered/chose to plod through the questions only about half the time. A tactical blunder, just $48,000 of the above winnings were Bonus Bucks. I figured I left about $100,000 on the (imaginary) table.

Anyway, I opted into the final round, and probably will try a 3-stock strategy. I'll let you know how it works out.

Congrats to everyone who participated, and Happy Mother's Day!

best

dk

A Noticeable Wobble

A big day of so-so selling pressure was followed by a big day of so-so buying pressure.

Because of this week's TOF Ratio spikes, the current wobbly internals and Thursday's rout, the bears sit this weekend with a slight technical advantage (they've certainly had a fundamental one for a while).

To break the backs of the dip-buyers, the bears need heavy, downside follow-through. Lately, this has been a big problem, as selling pressure has been very disorganized for two months. They'll certainly get a crack at it again next week, as the short-term trend is down.

Added to the bear's "IT To Do List" is a take-down of the IBD100. It had a another strong day on Friday, outpacing the markets with a 1.4% gain as 82 of 100 stocks moved higher. Even better, 17 stocks hit record highs, while dozens more are still perched right beneath new highs. One of the earliest signs that the IBD100 gives is failed breakouts: new highs that reverse intraday, leaving tall wicks -- or worse. So far, there's been none of this, and it will be something to watch for next week.

Looking ahead, the chart below shows a new and fast-growing problem for the bears. The Tech Ratio is climbing hard, as investors have acquired a fresh taste for tech stocks. AAPL, MSFT, IBM, HPQ, INTC, AMZN, EBAY, NVDA, DISH, XLNX, JNPR and dozens more have all given strong 2007 guidance and sit near new highs.

The Tech Ratio hasn't seen this type of acceleration since the July bottom. The green dotted line is a 52-week high, and immediately above is a 3-year high (not shown). The broader market has set a gaggle of records without the help of technology stocks. Should tech get rolling...








No matter how you slice it, the NASDAQ looks shaky short-term. Friday printed an inside day on a 22% volume fade, which doesn't help the bulls much at all. On the other hand, technical indicators are actually flashing a mixed picture. For example, the declining volume spikes aren't my favorite, yet they haven't troubled OBV or MFI much. ADX is a bit of a mess, but stochastics are acting fine, and are actually showing some positive divergence vs. last week.

I put up some Fib targets. Along with the EMAs, this sizes up the pullback possibilities.








The weekly chart shows a healthy consolidation pattern. The lower volume is a good sign, and helps explain the OBV and MFI strength on the daily chart. The bears have a short-term advantage, but they have a lot of work ahead to alter the IT direction of the market.








A look through the weekly charts shows consolidation patterns everywhere, and the Banks are a good example. If you look closely, the BKX has developed a 22-week diamond pattern. 60% of the time, diamonds break in the direction of the original trend.






Dojis are widely assumed to be bullet-proof reversal indicators. In truth, when the trend is strong (see MACD and ADX), they're consolidation patterns. The SOX could move lower without damaging its uptrend.








The Transports are another example of low-volume consolidation on charts in uptrends. There are many this weekend. The TRAN is a great-looking chart that supports the argument: pullback, yes; selloff, no.








If you're working on a shopping list, in addition to tech stocks, another area of strength are the energy stocks, particularly the drillers. The chart below graphs the USO against the drillers. Note that while the price of crude has declined over the past year, the drillers have kept climbing! To decouple like this is very bullish, and suggests that, to the drillers, oil needs to be pulled out of the ground regardless of the short-term price.






Finally, this week wouldn't be complete without a last look at the TOF Ratio. After all of the spiky fuss on Monday and Wednesday, the Ratio has calmed down and once more is in near-perfect position.






Next week sees less earnings news and more economic data. CPI is the big one, and it wouldn't surprise me if it comes in hot. The market won't like that much, but unless something unexpectedly bad comes along, pullbacks are likely to be shallow and short-lived. That will end soon enough, so always keep your exit strategy handy.

Until then, have a great weekend, and Happy Mother's Day!!!

best

dk

De-correlation in the Precious Metals

I received a couple of comments on Thursday about the precious metals. If you'll recall, they fell worse than the stock market on inflation-rich economic data, offering no refuge for gold bugs in their time of need. One comment touched on the fact that the correlation dynamic of precious metals with the stock market has changed over the past year. It's a good observation and something I've had my eye on as well.

While the long-term intrinsic value of PM's is an arguable point, nonetheless they remain a tradable asset class. This makes PM's susceptible to all the short-term delights a market has to offer, including big valuation swings, bubbles, de-correlation, etc.

The real wake-up call that the PM dynamic had changed was the May 2006 correction. Surprisingly, both stocks and gold tumbled, and gold fell especially hard -- 26% in 6 weeks -- while the Composite fell just 15%. However, the kicker was the July bottom. The chart below shows that the NASDAQ bounced back and has held up well against gold for the past 11 months.







Meanwhile, a weekly chart shows that gold has been even money for a year, while the USD has tumbled 7% (perhaps the oddest thing of all). Now, gold appears to be developing a bearish snout. While many contend that the July 2006- present stock market rise has been an inflation-driven affair, gold's weakness suggests that something else may be going on.






Since both the red and blues are climbing, gold remains in an uptrend. However, other asset classes are outperforming the PM's, so a light touch at this point is probably a wise idea.

best

dk

The Big Dump

Well, it appears that the TOF Ratio is working after all.

Traditionally, whenever the option pit l-e-a-n-s w-a-y o-v-e-r to one side, that side is about to become the wrong one to be on. This was proved true yet again on Thursday when sellers chewed right through six days of trading gains in just 6 1/2 hours. Making matters worse, they did so on an 8% volume surge.

The stats were bad. The Dow notched its first triple-digit loss since the market followed-through on March 15, and all 10 primary stock sectors closed lower -- each by more than 1%. Adding to the fun, all of the indexes closed at their lows, suggesting we'll see more selling at the open.

Market internals turned nasty as well. On the NASDAQ, 8 out of 10 stocks closed lower, and an eye-popping 85 out of every 100 shares traded on Thursday was a sell.


Other than that, how was the play Mrs. Lincoln?

Like a parable, the market speaks in mysterious ways, and Thursday was no exception. Even though the charts look positively dreadful tonight, there was a unusual twist in Thursday's action: the IBD100 held up surprisingly well. Nastar picked up on this mid-day, but the IBD100 closed off just 1.9% -- the same as the RUT. Breadth was actually better than on both the NDX and OEX, and 12 stocks hit record highs.

However, the real surprise was that the selling pressure on the IBD100 was unusually light. Even though 86 of 100 stocks closed lower, just 16 of those printed distribution days. This number was so low that I checked both the NDX and OEX as well. While 90 of 100 NDX stocks closed lower, just 26 were distribution days. The OEX was even more unusual: 92 of 100 stocks closed lower, but only 19(!) printed distribution days.

At this point, there's no way to know the true significance of Thursday's so-so selling pressure. Sometimes big selloffs start slowly before gaining momentum. Like hurricanes, this is certainly the season for selloffs.

That said, the chart below shows that the Composite took a technical hit, but 43 points is a lot of ground to give on just 2.3B shares. The bulls didn't even put up a fight, and that raises questions.






A walk through the roughly 3 dozen subindexes I track is a very grim scene this evening. In choosing what to look at tonight, the term triage comes to mind.

The Banks got hit hard, harder in fact than the US Technology Index (-1.1%), which is interesting in itself.






Drugs -- supposedly a safer haven -- got smacked down worse than the riskier Biotechs (-2.0%).






A lot has been made of the recent Dow Theory confirmation, especially Richard Russell's bullish conversion this week. The Dow, Transports and Utilities all fell on Thursday, but volume was very suspect. On the Dow, volume was flat; on the Transports it rose to just average; and on the Utilities the volume actually fell. With 147 points on 466 million shares, the Dow posted its biggest decline-to-volume ratio in almost two years.






Perhaps Thursday's biggest surprise -- and irony -- was that the hardest falling sector of them all were the precious metals (XAU -2.7%). Considering that stocks fell on a blast of wicked, inflation-laden economic data, it's a bitter irony that gold bugs had no refuge. Gold pierced its 50-day, while silver is headed towards its 200-day.







Thursday was nasty, but the bears have a lot of work ahead to reverse the IT course of the market. Until they do, selling offers some of the most valuable clues about what stocks are worth owning. Expect more selling near-term, and adjust your risk profile accordingly.

It'll be interesting to discover if Thursday's weak selling pressure was a just a prelude to heavier selling, or to something different -- like more buying. It may take several days to find out, and be prepared for either outcome.

Until then, have a great evening.

best

dk

Apple vs. the World

When it comes to companies that compete with one another, ratio charts can provide a dynamic -- and statistically unbiased -- view of which company the market feels has the current advantage.

Below is a look at a few noteworthy head-to-head competitions that Apple is currently involved in.

While MSFT is triple the size of AAPL and has huge penetration in areas like OS, the chart below shows that investors have a very different take on which company is the better investment. After 5 quarters of duking it out, AAPL has sprung to a new high vs. MSFT. This suggests the following formula: iPhone+iPod+Leopard > Vista+Zune.







Regarding the iPhone vs. Blackberry, RIMM shouldn't be underestimated. The chart below shows that the market sees the iPhone as a distinct, consumer-oriented product that isn't going to eliminate Blackberry's business-oriented appeal. For now, investors are saying that there's room for both of these products in the handheld communication space. Once the iPhone is released, the line on the chart will likely start climbing however.







The consumer cellphone market is a very different story than that of the Blackberry. A look at AAPL vs. NOK and MOT shows that the current cellphone leadership is about to receive a major challenge from the iPhone. NOK is obviously regarded as the more worthy competitor.







In the computer segment, a comparison with DELL and HPQ clearly shows that AAPL is gaining ground in market share. DELL is more of a pure computer play, and the market share increase with Apple computers is easier to see. HPQ is a much better overall company, making those gains encouraging in a different way.







I'll update these periodically as things develop.

best

dk

Heavy Winds

With a heavy gale of weak economic data filling their sails, sellers are finally making tracks to the downside today. It appears that Wednesday's big VIX call-buying spree may yet prove to be the smart money at work.

As the bulls know, the real trick to make it stick for the bears is follow-through.

best

dk

FOMC Teflon

Quien es mas macho? El toro es mas macho!

On yet another day that seemed perfectly prepped for a selloff, stocks shook off the FOMC volatility to close at new highs. Amazingly, the Dow, SPX, NASDAQ, NDX, SML, MID and WLSH all set records on increasing volume. Apparently, the Fed's hawkish yada-yada-yada was already baked into the cake.

After an unchanged close on Tuesday, the IBD100 solidly beat the broader market Wednesday with a 1.2% gain as 76 of 100 stocks closed higher. While an impressive 24 stocks hit record highs, another 3 dozen IBD100 stocks sit just below new highs. This is a strong sign indicating that this rally has juice.

Market internals are corroborating the IBD100. While breadth is lagging, Up Volume and New Highs support the idea that the market has the structural integrity to keep moving higher.

Strong bull rallies don't provide comfortable entry points. Bears hoping to clean up short positions, and Bulls hoping for a decent entry point both appear to have been foiled for the um-teenth time since the March bottom (in truth, it's a pattern of discomfort that began last summer).

The best thing about the NASDAQ chart below -- besides the 6 1/2-year closing high, outside candle, 12% volume increase and OBV climb -- is that Money Flow curled upwards on Wednesday. This is an important development, and helps make the Composite a great-looking chart tonight.







Option investors -- now convinced that the market has nowhere to go but up -- went on quite a call-buying spree Wednesday morning. Thankfully, by the close they had (somewhat) returned to their senses. It's disquieting to feel relief that the TOF Ratio closed "down" at its upper boundary, but such was the nature of Wednesday's option action.

Blarg was correct that the index call action was far more severe than for equity calls. To show the effects of this, below are two versions of the TOF Ratio. The first is the familiar "official" one that uses the combined index and equity option data ($CPC). The second uses just equity options ($CPCE). Many aficionados prefer the equity version in this context, as it's allegedly the "dumb money". Consistent with the investor sentiment data, the dumb guys don't seem as convinced as the pros.

It's tough to know what to make of this high TOF Ratio level. The VIX has had similar issues lately, and has been "too high" for the current stock market strength.








Even without expectations for a rate cut, the Banks continued their recovery on Wednesday. Technically, the Banks appear to be organizing an inverted H&S. In many ways, a healing BKX is one of the most promising charts for this market.






Another promising chart for the broader market is the SOX. It continues to follow-through on its breakout, and has now closed higher 11 of the past 16 sessions.







Finally, it's worth pointing out that investor sentiment, whether measured by AAII, lowrisk.com, Investors Intelligence or the Ticker Sense blogger poll, unanimously tipped more bearish this week. The higher stocks climb, the more cautious investors become. Of course, this is the ideal reaction to higher stock prices. The last thing this market needs is a bunch of bulls.

As a change of pace, below is the Investors Intelligence Bull/Bear Ratio. Notice how much lower the Ratio is now than it was in January, even though stocks are 7% higher. You couldn't ask for a better contrarian recipe for a continued rally.







Last night, the market provided sellers an excellent opportunity to push this market lower. Technically, the indexes were wobbly, and fundamentally, a laundry list of weaknesses exists to capitalize on. 24 hours later, the laundry list remains intact but the technical structure of the market has shifted back to the bull's favor.

The are no guarantees of course, but the odds have improved for stocks to eventually move higher from here.

Until then, have a great evening.

best

dk

Oops! They Did it Again

Just two days after an epic feast, option investors started the day Wednesday by gorging on calls again (in fact, they seem to be swallowing them whole). As a result, the TOF Ratio is printing a HUGE spike this morning. While this is an intraday chart and not worth the paper it's printed on, a close anywhere near this hot would be considered a tad contrarian bearish.







A check of the ISE Sentiment Index shows that it's seeing the same thing. While the TOF Ratio's divisor -- the CPC -- combines both index and equity options, the ISEE uses just equity options and more closely resembles the CPCE. A critical thing to remember with both of these charts and that they're prone to enormous intraday swings, more so than most charts you'll run across. Bear that in mind, say...at about 2:15pm.







Speaking of the FOMC statement, in addition to TOF's chart list, I've parked a live TOF Ratio here, and the ISEE is live here.

From the Department of Perfect Timing, Bill Luby pointed out this morning that the CXO Advisory Group has published an analysis of the P/C Ratio as an indicator. You should read the full article, but their conclusion is that -- used on its own -- CPC is "not a useful indicator for short-term or intermediate-term trading." OK, I feel so much better.

best

dk

Another Bounce

On a day that began with all the markings of a pullback, the NASDAQ bounced again on a 19% surge in volume.

Even though the market is flashing signs that it's ready for a ST rest, investors surprisingly continue to buy the dips. That buying resolve may be put to a sharp test on Wednesday, as the potential for a hawkish Fed statement is high. If the past is any guide, a "no-cuts-in-sight" FOMC statement offers investors a decent chance for lower stock prices.

Should the statement be as dovish as the bond market suggests, all hell could break loose to the upside as well. Recent economic data suggests a dovish Fed is a longshot.

The declining volume spikes over the past two weeks in the chart below are one of several tells that buying interest is waning. However, even if authentic selling pressure shows up, the bears may be lucky just to get the Composite back down to its 50-day -- about 3% lower. The market may look wobbly, but it's definitely NOT telegraphing that the IT uptrend is over.






Short-term, the biggest internal problem for the NASDAQ is breadth. Since last week's selloff, Advancers have struggled to outnumber Decliners. As a result, the NASI failed to take out its recent high, and today's little rollover may have clinched the deal to the downside.







Even though the market is wobbly and CSCO got a chilly reaction to their earnings report, there's been a distinct pickup in investor interest for tech stocks. The Apr 24 SOX breakout was an important signal that something new was afoot. Then on Tuesday, the Tech Ratio -- $DJUSTC:$COMPQ -- hit a 5-month high as it followed through on its trendline breakout.

There's no reason to get excited until the dotted line gets taken out, but the Tech Ratio is strengthening. Adding to the mix, on Tuesday the NDX outperformed all of the indexes, and its Top Ten gainers were all tech stocks, something that hasn't happened in quite a while.






When it comes to market weakness, the belly of the beast definitely includes Retail. The RLX is printing a loose, 6-week H&S formation, and it confirmed below its 50-day on Tuesday. If you're looking for shorts, consumer discretionary is a target-rich environment these days.






As a follow-up, the TOF Ratio cooled considerably on Tuesday.







Based on the overbought conditions, the TOF Ratio spike, the elevated VIX, weak breadth and May seasonality, tomorrow's FOMC statement could create a hefty dose of market volatility. The key to avoiding a shakeout is to watch the volume.

Until then, have a great evening.

best

dk

Early Warning Sign?

This market has been thin on warning signs, but an early one may have cropped up on Monday.

The TOF Ratio -- $COMPQ:$CPC -- registered an unusually hot reading on Monday,and closed above an important upper boundary. Option investors, convinced that the market's going up, swung hard to calls.

Whenever the option pit reaches this type of consensus, it's a signal that the current move may be nearing an end. The timing accuracy of this type of signal is very imprecise however. That's a big reason why technicians use indicators in combination. For the record, few other technical indicators - except ST overbought -- are suggesting any problems.

Today's print is just an early warning signal. The TOF Ratio doesn't trigger a Sell until the 21-day crosses back below the 50-day.







Below is a 9-year view of the TOF Ratio which help puts the current peak in perspective. The last time the Ratio got this high was in Oct 2005. In that case, the market didn't top for another six months. Notice as well the famous irrational exuberance of the dotcom bubble in 1999. The TOF Ratio really over-ran its banks then, and may again some day.







The TOF Ratio wasn't alone. Other timing indicators that use option data showed early warning signs as well on Monday. At VIX and More, Bill Luby noticed a similar pattern in the ISE Sentiment Index (ISEE). The ISEE uses opening long call and put positions to gauge investor sentiment. Like the TOF Ratio, extreme positions mark tops and bottoms. ISEE shot up on Monday as investors bought calls, but didn't print an extreme position.







It's important to understand that the twitchy options data was about the only thing that was questionable about Monday's action. As the Dow took out an 80-year record, the NASDAQ pulled back on quiet trade. Composite volume fell 22% on just a 1 point pullback, a very positive sign.

Like the indexes themselves, the market internals were mixed: up on the NYSE and down on the NASDAQ. Still, New Highs outpaced New Lows 9-to-1 on both exchanges, a very strong ratio. Also, the IBD100 hit a new multi-year high on Monday, beating the broader market for the 4th straight day with a 0.5% gain. Even more important, a whopping 30 of 100 stocks printed record highs, a very strong number and up from Friday's 22 new highs.







Another good sign is that Banks continued their recovery and hit a 10-week high on Monday. Yields have been slipping for 4 weeks as interest rate doves continue hopes for a 2007 Fed cut. It's possible that the current Bank strength is tied to this expectation, an expectation that many indicators suggest is wishful thinking.

Bank strength and yield weakness ahead of an FOMC meeting is a very optimistic combination. If the Fed stays inflation hawkish in this week's statement, the markets may express disappointment.

Below is the BKX and the 10-year Treasury yield. The horizontal green line on the BKX is the old all-time high.








How you choose to react to Monday's TOF Ratio has a lot to do with the stocks you own and your tolerance for risk. It's a warning sign -- nothing more, nothing less.

Financial stocks and the bond market appear to have raised the stakes on the FOMC meeting. CSCO will be interesting tomorrow, but this week's real drama will be the pin action from Wednesday's Fed statement.

Have a great evening.

best

dk

A Big Week for Stocks

This market hasn't rewarded fighting the tape.

For investors tempted to do so, Friday's action showed the usefulness of keeping a keen eye on market internals. After a busy morning, I checked in on the action just in time for the abrupt lunchtime selloff. Volume was strong as the market slipped into the red, potentially a very troubling development.

However, a quick check of the market internals showed that while the market was falling, surprisingly all three internal indicators stayed positive. This suggested more of a buyer's strike than a worrisome pickup in selling pressure. It's also a pattern that the market has flashed 5-6 times in the past 8 weeks. This stealthy strength -- especially on stronger volume -- was a tell that buyers were likely to scoop up the discounted shares, which is exactly what happened. When the market truly turns, internal weakness will be undeniable.

The IBD100 sent a similar message on Friday, as it too stayed positive throughout the noon dip. It also beat the broader market for the third straight day, adding 0.9% as 68 of 100 stocks moved higher. Record highs have increased in each of the past three sessions as well. On Wednesday there were 9, then 16 on Thursday, and an impressive 22 on Friday. Also on Friday, just 4 IBD100 stocks printed distribution days.

For the record, the IBD100 has had a bumpy April, due largely to earnings volatility. nastar takes the time to chart the IBD100, and his last posting shows how the IBD100 has lagged the NASDAQ in April. This lag is a long way from a Sell, but it's important for the IBD100 to accelerate and begin leading again. Continued divergence from the Composite will almost certainly spell trouble for the market. Thanks, nastar. This is a useful chart, so please keep posting it.

Below, the Composite looks excellent, especially the hammer on a 4% volume surge. Black hammers have a reputation as topping indicators, but pullbacks continue to be bought. The bigger weakness is that Money Flow is flat.







A week ago, the market had printed three new highs on declining volume and weak internals. A selloff was a near certainty, but the next step was very unclear. I commented that it would be interesting to see where the market would be this weekend, and especially how it got here. What a surprising journey it's been.

The chart below shows the power of the bid that's currently driving this market higher. In just 8 hours of trading on Mon and Tue, 1 1/2 weeks of gains were wiped out. Then, buyers stepped in to turn the indexes around and push them to record highs. This was an impressive show of strength, and a sign that the bulls aren't messing around. The pullback almost tagged the 10-week before heading higher, and the resulting hammer is very bullish. Quien es mas macho? El toro es mas macho!

The SPX, Dow, NDX, NYSE, MID, SML and WLSH all reversed mid-week to print new record highs. The strength is also a global phenomenon. Australia, Brazil, Mexico, Toronto, France, Italy, Germany, Belgium, London, Seoul, Shanghai and Singapore all hit record highs this week. This bull is hunting in packs.







For over four years, pundits have been recommending that investors pre-emtively avoid small-cap stocks and buy large-cap. However, the market itself disagreed, and the RUT rallied 140% while the SPX gained just 70%.

Things may finally be changing however, and it's the market doing the talking this time. I created the DIA:IWM ratio chart below after reading an article I can no longer find (thanks, unknown author...and apologies). It shows that large cap stocks appear to have put in an important bottom. A break above above 1.634 resistance would likely trigger an acceleration of the large cap phenomenon.

What does this mean? Bill Luby wrote a great post about what history suggests could happen as a result of this shift.






One benefactor of a return to large cap could be technology stocks. Is It Time to Buy Tech? shows that tech finally appears to have put in an important bottom last summer, and is currently looking for follow-through. Though it's still early for a buy trigger, the Tech Ratio has improved since that post, and is now banging at its 8-month downtrend line. When this chart breaks above 0.236, a noticeable shift in tech stocks will be visible to the naked eye.






Speaking of tech, the SOX added to its breakout and notched a new 52-week closing high. This is a very nice-looking chart.






NASDAQ volume continues to accelerate with this rally, another encouraging sign.






Finally, the TOF Ratio remains in a near-perfect condition. By mid-day Friday, it had grown very hot. However, the noon sell-off spooked option investors and cooled the ratio down.







It's been a long, long time since the market has run this hard for so long. For example, the Dow has been up 23 of the past 25 sessions. If you go back to 1896 to see what happened after other occurrences of 23-for-25, you'll find that...well, there haven't been any! The Dow has never posted gains in 23 of 25 sessions.

This has lots of investors v-e-r-y nervous. Investor sentiment is starkly negative, the VIX stubbornly refuses to go down, the economy is wobbly and many of the bearish arguments make a lot of sense. Regardless, the stock market has caught the scent of something, and seems very focused on moving higher.

Following the ball is very different from being reckless. Save an act of God, markets have a knack for giving off unmistakable warning signs. Maybe they will next week, but for now, stocks continue to look like they have more upside ahead. For contrarian investors, it's a positive twist that so many investors remain concerned.

Until next week, have a great weekend.

best

dk

SPX 1500

It's been a long travel day for me, but Thursday's action had a few twists and turns worth mentioning.

The mainstream press is all over SPX 1500 and Thursday's gaggle of new index highs. There's good reason of course, because the NASDAQ, NYSE, SPX, Dow, NDX, SML and WLSH all hit record highs, a solid technical development. In fact, tonight the SPX is parked just 3% below a new all-time high. Should the SPX take out this old high with gusto, it's very likely the stock market will catch an updraft and push even higher.

The biggest problem with Thursday's action was that the records happened on mixed volume. NASDAQ trade picked up 2%, but NYSE volume slipped 5%. Of course, this also means that sellers were non-existant, making one day like this little cause for alarm. However, unless institutional investors throw a shoulder into these new highs soon, another pullback is almost certainly in the cards.

That said, total volume was about the only problem with Thursday's action. Market internals were strong yet again, and New Highs outran New Lows 419-62. That's the second straight day the High/Low ratio came in at 7-to-1.

Also, the IBD100 was strong. The index outpaced the broader market again on Thursday after tripling the SPX's gains on Wednesday. New Highs picked up from 9 on Wednesday to 17 on Thursday, another good sign. According to Investors Business Daily, the IBD100 is up 10% in 2007, vs. 5.9% for the SPX.

Despite the so-so volume, it remains a handsome chart tonight. The technical indicators all look strong.






New highs and good economic data aside, one of the most provocative data points to come out on Thursday was the AAII Bull Ratio. Despite last week's solid market gains and earnings reports, investor sentiment plunged!

The Bull Ratio tumbled to the warning track (dotted line), it's lowest level since last summer. The disconnect is that the SPX is 23% higher since then! Individual investors have no faith in this rally, a fact corroborated by the weak fund inflows institutions are seeing. Of course, this is very contrarian bullish -- almost to an extreme. It will be interesting to watch this divergence work itself out. Who blinks first?






I'll be in and out tomorrow, but should have time for some weekend commentary. Until then, have a good one.

best

dk

A Clean Hand-off

The market wasted no time in following-through on Tuesday's bullish reversal.

Wednesday was an important show of strength, made even better by truly excellent market internals. 70% of all NASDAQ companies closed higher as 8 out of every 10 shares traded was a Buy. Also, New Highs outpaced New Lows a very solid 406-71. Even though volume slipped 11%, the quality of market internals was a more important gauge of Wednesday's action.

The IBD100 made an important comeback as well, adding 1.7% on stunning breadth -- 82 of 100 stocks closed higher. Because of the recent pullback, just 9 stocks on the IBD100 tagged record highs. However, about 30 more stocks sit right below record closes, a very healthy sign. The market leadership continues to look fine.

Even though stochastics are pretty sloppy, fast MACD is bouncing off of slow while the ADX lines avoided a negative crossover altogether. 8 weeks of advancing and backfilling has left the trendline flat, but otherwise the Composite remains in very good technical shape. It doesn't hurt that it's a hair's-breadth away from a new 6-year high either.







Networking and Telecomm stocks have been market leaders, and Networking notched another 6-year high on Wednesday. CSCO reports next week, and has been bullishly working on the right side of a base on solid volume. INTC, TXN, AAPL, MSFT, GOOG, and AMZN each put up strong Q1 numbers and moved the market. CSCO will likely do the same. Below are charts of Networking and CSCO.







Speaking of technology...last summer, investors rotated rapidly out of commodities and into tech stocks. This phenomenon was partly responsible for the big gains in the back half of 2006. After a 3-month pause in 2007, this rotation appears to be gaining momentum once again. The tech/commodity ratio chart below is back at levels not seen since December. However, you'll know investors are really serious about tech when this ratio takes out its Jan high.







As TOF described, the TOF Ratio is in excellent shape. The averages and stochastics are in near-perfect position, suggesting this rally still has legs.







Like TOF, I'm also on the road tomorrow through Monday evening. My itinerary has gotten complicated, but I'll check in when I can.

Until then, remember the expression, "In price there is knowledge, but in volume there is truth." If you follow the volume, it's more difficult to make mistakes.

Have a great evening, and I'll see you from the road.

best

dk

The Preponderance of Evidence

A criminal conviction requires the assessment of guilt beyond all reasonable doubt. Success in the financial markets is more like civil law: all that's required is a preponderance of evidence.

Since the March bottom, the market has definitely provided such a preponderance. However, if the sentiment polls are correct, many investors have had a difficult time believing the signals. The urge to try and outsmart the market is very powerful. However, following the market -- rather than anticipating it -- works with astonishing consistency.

Below is a timeline of key "follow the ball" moments over the past two months. Each of these signals came directly from the market itself.

Enjoy.

best

dk


Feb 27 - Mar 3 -- A 9% Shanghai plunge takes the US markets down 7% in a week. Bearish investor sentiment skyrockets, and the VIX doubles. Despite just a 7% tumble, investors are unusually scared.

Mar 15 -- In the grips of selloff blues, the Ides of March sees a huge intraday reversal at the NASDAQ 200-day. It surprises amateurs and pros alike, and carries all of the hallmarks of a double-bottom (it was; chart below).

Mar 16 -- VIX confirms its peak and then falls, triggering a VIX Buy signal.

Mar 21 -- Marty Zweig's famous Nine-to-One Up Day. Every bull market in history has been launched by one of these: Up Volume outpaces Down Volume by a ratio of 9-to-1.

Mar 22-24 -- A 5-10-20 Buy signal is triggered on all of the major indexes.

Mar 24 -- The 2 year/10-year yield curve inversion heals, and copper -- the metal with a Ph.D. in economics -- has now rallied 28% off the Feb low. Regardless, the recession drumbeat grows louder on subprime woes.

Mar 26 -- Gory details of the subprime mortgage fiasco spark a huge market sell-off -- for 15 minutes. The Composite bounces off the 50-day and closes in the green, while 24 IBD100 stocks print record highs. Lots of pundits are stunned...though it may have been due to the surprise death of Anna Nicole.

Mar 29 - Apr 1 -- The Stealth Rally: as pundits obsess about the looming weak earnings season, the Composite bounces off 5-month support for 3 straight days while market internals stay positive. The IBD100 quietly begins a long rally on huge breadth and record highs.

Apr 2 -- The market internals -- and the IBD100 -- prove correct, and the NASDAQ breaks out above its 50-day. It hasn't been back since.

Apr 4 -- The TOF Ratio triggers a Buy signal.

Apr 10 -- NYSE hits new all-time high.

Apr 16 -- The Day of Global All-time Highs -- Nine global markets print all-time highs, and the NASDAQ, Dow and SPX all gap-n-run. This marks the second in a series of bullish ascending islands. SPX and hits new 6 1/2 year high. MID hits new all-time high.

Apr 18 -- The Dow hits new all-time high.

Apr 19 -- US markets are unfazed by another heavy Chinese selloff. Surprisingly strong Q1 earnings have become a primary investor focus.

Apr 20 -- Dow Theory confirms rally on trifecta of new highs. Meanwhile, OEX and NASDAQ break above key Fibonacci levels.

Apr 22 -- NASDAQ, NDX and SML hit new 6-year high.

Apr 24 -- The beleaguered SOX breaks above 5-month resistance and posts 52-week high.

Apr 25 -- Dow hits 13,000 as New Highs outpace New Lows an astonishing 602-69.

The story continues...

Turnaround Tuesday

The stock market gave investors a fresh twist on Turnaround Tuesday.

The day had all the makings of a heavy distribution day, when stocks suddenly reversed mid-day and climbed up out of their hole. Volume was heavy, and NASDAQ trade accelerated 13% over Monday's selloff. This gives the reversal bullish significance, and it doesn't hurt that the Dow printed yet another all-time record close.

The big boys are clearly back in the game. 3 of the 6 heaviest volume days of 2007 have occurred in the past 5 sessions -- and they've all been up days. While the Dow's string of positive closes grabbed headlines, the NDX has quietly climbed in 12 of the past 14 sessions. Also, NDX trade shot up 22% on Tuesday, as 60 of 100 stocks moved higher. Regardless of what month it is, these aren't the signs of a market that's ready to roll over just yet.

Financial markets are so complex that they rarely give clear, perfect signals, and Tuesday was no exception. Despite the bullish fireworks, market internals didn't recover so cleanly. NYSE internals did better, but the NASDAQ closed with negative breadth and volume, and New Highs and Lows were a tie. Of course, this could be marking a "bottom" for the internals. but it remains an important blemish this evening. Tuesday's recovery attempt will fail unless the internals improve almost immediately.

The IBD100 was equally unimpressive. Not only did ROCM implode 21%, an eye-popping 20 stocks fell more than 2%. As a result, the IBD100 never recovered, sliding 0.4% as only 44 of 100 stocks moved up. Not a great showing from the fundamental leadership.

That said, no amount of doom and gloom can change the fact that the markets remain in a strong IT uptrend. Shorter-term, a big down day on average volume Monday was followed by a bullish reversal on heavy volume Tuesday. In pullback mode, this counts as a tie. Each side needs a follow-through day (or two) to reclaim momentum. Don't assume it will happen tomorrow.








If you look carefully at the 60-minute chart below, the two hammers this morning show that the reversal took the form of a bullish double bottom. That's a good sign. Even better, MACD is printing monster positive divergence. MACD is back to the Apr 30 level, while price is still 30 points lower. Hourly charts are notoriously fickle, but that's still one heck of a bullish print.







Stocks and volume are moving in the same direction again -- upward -- which is a very positive sign.







On a day like today, you've gotta look at the Banks. The BKX has now successfully backtested its 50-day three times in the past 11 sessions. So far so good.








Of all the commodities, copper has the most successful track record in predicting economic health. In a nutshell, strong copper means strong economics. After vaulting 55% off the Feb bottom(!), copper has been trading sideways for 3 weeks and now looks poised for more gains. Higher commodity prices generally mean higher inflation, but in the middle of an economic slowdown, this type of copper strength is very net-positive.








On Monday, every sector fell on essentially average volume. The index losses were big, but distribution days were scarce: only 16 on the NDX, and 20 on the OEX. On Tuesday, distribution days fell to just 12 on the NDX and 9 on the OEX. The IBD100 -- despite its poor showing -- saw its distribution day count fall from 35 on Monday to just 16 on Tuesday. The selling simply isn't as intense as price would suggest.

This creates the impression of TOM-related activity -- or even overbought adjustments -- rather than some new sea change. That will happen soon enough, but now may not yet be the time.

Until tomorrow, have a great evening.

best

dk