dk Report Considers Calling it Quits

I've recently received a new business proposal that I'm giving serious consideration. Should I accept, it's unlikely that I would have time to continue The dkReport. No decision has been made, but I thought I'd run it by everyone here first.

A new, three-star US hotel is in the planning stages (location undisclosed), and I've been asked to sit as chairman and run the operation.

Hotel management would be a new pursuit for me, although I'm an experienced entrepreneur with over 25 years building and running my own service businesses. Also, I worked in the restaurant industry for 11 years growing up, and know first-hand the joys and pains of the hospitality industry.

The good news came in the following letter, which I thought I'd share with you. It's obviously a foreign company, and the odd syntax and grammar has an old-world charm that I find endearing.

---------------------------

Dear Mr. Kneupper

I am Mr. Tony Adamson, I wants to buy a three star hotel building in your country within the range of $28 million US DOLLARS.

I solicit for your cooperation to an experienced Person like you, to assist set up develop this project in your country and assume responsibility of ownership as a chairman and operational partner in this Establishment, for your assistance you shall own 30% of the investment as the chairman & operational partner.

Your immediate reply will be highly appreciated and I shall give you more information on this project.

Please contact me at my private E-mail: mr_tonyadamson1@myway.com

Mr. Tony Adamson
LONDON UK,
+44-704-5705611.
mr_tonyadamson1@myway.com

----------------------------

Cool huh? There is no such thing as luck -- it's just opportunity meeting preparation, and I've been prepared for something like this for a long time.

I'm writing him now, and I'll let you know how things work out.

best

dk

Threat to the iPhone Discovered!

The release of Pixar's Ratatouille is one of the few things with any hope of stealing the iPhone's thunder this weekend.

Over the next three days, roughly the same number of Americans will see Ratatouille as will buy the iPhone, placing Steve Jobs at ground zero of American popular culture. It will be over soon enough, but for now, it's good to be the Steve.

Friday morning, Fake Steve at The Secret Diary of Steve Jobs posted the memorable, 29 June 2007: The Day the World Changed. Later updates revealed that Washington politicians even came out today with iPhone position statements:

Edwards: "iPhone will eradicate poverty"; Clinton: "iPhone will transform health care"; Guliani: "If you don't buy an iPhone, then the terrorists have won"; Gore: "by combining 3 devices, the iPhone reduces greenhouse gas emissions"; Brownback: "Discovery of iPhone is as profound as evolution, and I don't even believe in evolution"; Cheney: "Fuck the iPhone".

Muckdog at the The Learning Curve showed his considerable mettle as an economist on Friday. He pointed out that the iPhone could prove disinflationary to the US economy, as consumers reduce discretionary spending to support the rapid iPhone upgrade path. Furthermore, as money chases the latest iPhone releases, the product could actually act like a tax hike on consumers.

----------

All joking aside, this type of product phenomenon also generates enormous criticism. However, don't let either the overblown hype -- or the vicious backlash -- distract you from understanding the true significance of this product. In recent articles, Barry Ritholtz at The Big Picture and Paul Kedrosky at The Wall Street Journal come closest to identifying its biggest significance. As a creative professional, I can tell you first-hand that their observations are dead-on.

Here's what all companies can learn from the iPhone:

1. Every da Vinci-caliber idea springs from the imagination of a single person. Corporations rely on committees to solve problems. However, groups are genetically incapable of this level of innovation. It's counterintuitive and cuts against our democratic instincts, but companies should empower their best individuals (not just committees) to find solutions to their biggest problems.

2. Consumer interfaces suck. 100+ million mobile phones have been developed and sold, but they're as clumsy and difficult to use as ever. So are remotes, software, dashboards, kiosks and countless other interfaces. This was an accident waiting to happen, and other interfaces are vulnerable to change as well. Think about the Wii. I assure you, Sony does every day.

3. Ignore the consumer experience at your own peril. US cellphone carriers -- especially the uber-crappy AT&T -- are about to learn this the hard way. The US auto industry and broadcast media already have, and the airlines are at great risk of an uprising. The IRS got nicer, and collections improved. Imagine that.

4. Before you buy back stock, expand your R&D.

5. See #2.

--------------

At a lunch recently, I sat next to a very high-level executive at Sprint. I asked him why -- in this day and age -- we still have dropped cellphone calls. He said the answer was simple: consumers don't care. Research shows that all people really care about is a cheap phone and cheap monthly rates. They don't care about the service.

Oh really?

This is an accident waiting to happen, and what if something came along to change the status quo?

best

dk

Thanks, iMuckdog

I want to publicly thank iMuckdog (pictured above) for standing in line for my iPhone today.

Muckdog, I still think $10/hr is a little steep, but I know I had to match your pay from Kinko's (hope that flask of Ketel helps smooth out the bumps).

I know you're getting right back in line tomorrow to buy your own, so this really means a lot. There are friends, and then there's you:

the iYou.

Just give me a call when you get close.

best

dk

:)

It's So Easy...

On Thursday, Ben Bernanke (not pictured) left rates unchanged for the ninth time in 12 months.

Being the Fed chair is so easy, a c...

Final Q1 GDP numbers offered no cause for alarm Thursday morning, and trading began with stocks drifting higher on light trade. But as expected, chop and slop hit after the FOMC statement. Investors got out their Roget's and weighed inflation adjectives, trying to decide if "persisted" is worse than "elevated" (apparently it is).

However, volume dropped across the board, indicating that investors aren't that worried. Positive market internals actually tipped the so-so action in the bull's favor. It's worth noting that market internals (see charts) are improving after the recent spate of stock weakness.

Leading stocks added to Thursday's bullish bias. The IBD100 gained 0.3% as 51 of 100 stocks moved up, and new highs increased from 5 yesterday, to 17 today. Despite the drop in volume, 18 stocks saw accumulation vs. just 6 being sold. Market internals and the fundamental leadership point to a market prepped to move higher.

Today's NASDAQ candle pattern is a bearish setup, but it tends to have low/moderate reliability. Today's lame volume and the candle location inside the base weaken the gravestone case.

None of the major indexes look great, but for the moment they've stopped getting any worse either. Despite tomorrow's trifecta of quarter-end, month-end and week-end, it's hard to expect anything other than more choppy action -- but I'm willing to be surprised.









You've got to draw the line somewhere, so I've decided to go with the cheaper model tomorrow.









It's worth noting that, despite the wild VIX action over the past three weeks, the Put/Call Ratio remained well-behaved. In fact, the TOF Ratio had a positive crossover today, just six days after confirming a Sell. This isn't enough to wave the green flag, but it's a promising development.









Fed funds have now been at 5.25% for the same length of time that they were at 1%. The rate environment has been stable for many years, and none of the current economic woes -- except maybe inflation itself -- can be tied to FOMC policy. Higher unemployment -- not the housing debacle -- is the one thing with the mojo to budge the Fed lower.

Core PCE aside, Wall Street is now poised to shift its focus to the one thing that really matters: earnings. Epic short interest has a lot riding on bad news, and RIMM won't make their job any easier tomorrow.

Until then, have a great evening.

best

dk

Bulls (Finally) Bounce Back

The bears are still in charge, but they sure are doing it the hard way.

The NASDAQ gapped down to its 50-day on weak manufacturing data, then reversed course and put in its best day in over 9 months. The resulting outside day reclaimed 2600 and erased nearly three days of technical damage in just 6 hours. Volatility works to the upside as well.

The problem is that volume increased less than 1%. Although the mainstream press called Wednesday's action "window-dressing", the mediocre trade suggests that startled shorts fueled a big chunk of the rally. In truth, countless portfolio managers enjoyed a lucky technical bounce.

Because of this, the NASDAQ remains under Monday's Amber Alert. It stays that way until a follow-through day on big volume takes out the old high of 2631. Of course, that's just 1% away, and on the NDX, it's even less than that.

The recent strength in leading stocks is the most credible evidence that further highs are likely. The IBD100 lagged early on Wednesday, but came on strong in the final two hours to match the Composite's 1.2% gain. The critical tell was that the IBD100 saw genuine buying on Wednesday and not just panicked short-covering. 30 IBD100 stocks printed accumulation days, vs. just 17 on the OEX and 16 on the NDX.

Considering the litany of woes facing the financial markets, the major stock indexes continue to hold their own. The indexes are all back above their 50-day, and the NASDAQ's trampoline move was textbook. There's a lot of work ahead before the market looks healthy again, but the bears inexplicably squandered another easy kill.









In the "Erasing-Technical-Damage-in-Just-Six-Hours" Department, option volatility clearly wins the prize. I've made caffeine and methamphetamine jokes about the VIX, but after 16 straight days of intraday price swings ranging from 7% to 18%(!), it's not so funny any more. Instead, it has grown disturbing.

What it's saying is that there's tremendous disagreement among option investors about near-term stock market risk. The troubling part is that the intensity of these differences isn't fully visible in the stock market itself. Based on when this recent volatility began, it would seem that "bailing out" a hedge fund is viewed by the option community as a much nastier process than parties are letting on.








In Wednesday's durable goods report, the data showed technology as one of the few areas of business spending that's growing. This is consistent with what the stock market has been saying as well.

The chart below compares the Tech Index with the SPX. As you can see, for the past four weeks tech stocks have accelerated rapidly to just below a 15-month high vs. the blue chips. Regardless of how you choose to measure it, technology is steadily resuming a leadership role. At the very least, build a tech watchlist.








Everything bounced today, but stocks with big surges in volume are worth particular consideration. These are stocks under accumulation, and they tend to be more disease-resistant. This is an important quality in malarial times like these.

The big news tomorrow is the FOMC policy statement. There's lots of chatter about the Fed officially adopting an inflation metric that includes food and energy. This change seems unlikely, but you never know. Given the current volatility, a change wouldn't be viewed as "market friendly" near-term, regardless if it help the Fed do their job better or not.

Expect continued chop, and maybe even more buying. A 2:15pm fireworks show is a real possibility, and as long as you follow the volume, you should do OK.

I'm out most of the day tomorrow, but will check in later in the evening.

Until then, happy trading.

best

dk

A Puzzling Disconnect

Reflecting on the market, I'm reminded of the words of Robot B-9:

"Does not compute".

On a day that no index closed off more than 0.5%, the VIX shot up 13%! Also, Tuesday marked the 3rd time in 14 sessions that the VIX closed above its upper Bollinger band. However, these aren't even the stats that fail to compute.

In the past five sessions, the SPX has shed 2.6% while the VIX has skyrocketed an eye-popping 48%!

Option investors are clearly spooked, but the stock market doesn't seem to share this sense of dread. In fact, it's hard to tell what institutional investors are feeling.

For the second straight day, neither bulls nor bears established an advantage, and on Tuesday the NASDAQ closed off just 0.1%. Despite mortgage-backed hand wringing and congressional saber-rattling, sellers were unable to push the NASDAQ even 0.7% lower to the 50-day. While option volatility yapped like a chihuahua, NASDAQ volume fell 1%.

In a continuing theme, leading stocks continue to show few signs of wear. The IBD100 slipped in-line at 0.5%, though 22 stocks did print distribution days. This total is up from 16 on Monday, but it's hardly unusual. A look through all 100 stocks tonight reveals an IBD100 with a distinctly bullish bias.

Without a doubt, the broader market is very wobbly with abundant downside risks. However, it's apparently going to take more than subprime contagion, weak housing, soaring volatility, foreign selloffs, falling consumer sentiment, and 5% Treasury yields to convince investors that it's finally time to start selling with gusto. Obviously, investors want some really bad news.

After seven sessions of weakness, the bears are left with a NASDAQ that's still above its 50-day, but that's now oversold. In fact, the Composite hasn't been this oversold since the China meltdown in March. Furthermore, it's oversold in an uptrend, which wasn't the case in March.

This is a great situation for the bulls, but it's meaningless unless buyers show up to press the advantage. For whatever reason, that hasn't been the case for a while. The chart below is one the bears can destroy in a single afternoon.








After the Shanghai surprise in late February, the VIX popped into a new gear and hasn't downshifted since. It's important to realize that as the VIX soars to levels near the March highs, the NASDAQ is over 300 points higher since then! Equities have stomached this new rise in volatility with great conviction.









If the market was headed for real trouble, systemic "flight to quality" rotations would be visible to the naked eye. Since the first of June, the NASDAQ is down 1.2%, the SPX is off 2.5%, but Consumer Staples are off 3.5%. Considering that the 10-year bond is down 4.3% as well, there are few signs of a market hunkering down for bad weather.









Another interesting development is the precious metals' continued de-correlation with the financial markets. I've written about this before, but even though inflation risks remain high and mortgage unknowns abound, gold and silver aren't acting as a safe haven. Reasons for this are discussed in the link above, but for now, no asset class is taking the current market woes harder than gold and silver. Silver had a very bad day today and slipped below its 200-day. Surprisingly, the XAU leads all asset classes lower in June with a 5% slide.









This is a near-impossible market to call short-term. Even if you get it right, the volatility prevents you from staying that way for very long. The bears are in control, and one slice of bad news could push the market past the point of no return.

On the other hand, lots of things still "don't compute". Volatility aside, it will be interesting to discover why the fundamental leadership has stayed so strong during these trying times.

Robot B-9 had another, even more famous phrase. Until the market finishes strong each day on huge volume, I'll continue to heed the unforgettable, "Danger! Danger! Will Robinson."

Until tomorrow, have a great evening.

best

dk

VIX and VXN Ratios

In an ongoing quest to see if the VIX and VXN can produce Buy and Sell signals for stocks, I applied TOF Ratio settings to ratios of VIX:SPX and VXN:COMPQ.

[The TOF Ratio is a Buy/Sell indicator that divides the NASDAQ by the CPC, using EMA crossovers to trigger the signals. This indicator was developed by the legendary board poster, The Old Fool. I maintain a live version of it here -- fifth chart down.]

Though not perfect, smoothing the VIX and VXN Ratios with EMA's produces illuminating results.

In terms of indicator clarity, the VIX Ratio is the lesser of the two. In April, the synchronized rise in both the SPX and VIX logically produced EMA's that stayed flat for 7 weeks(!). Once the two became more "rational" and broke apart, the EMA's crossed and gave a Sell signal (red arrow). Note that the Sell is still on.






The VXN Ratio has behaved more reliably throughout the recent volatility ordeal. It's worth pointing out that, after a clean Buy signal in early April (green arrow), the signal is still on. This is consistent with a NASDAQ that is outperforming the financially-troubled SPX so far in 2007.






Bill Luby at VIX and More has been exploring the SPX:VIX for some time and has written a series of excellent posts on the subject. In response to our ongoing discussions, here's a link to his latest post on usefulness of the VIX Ratio as a timing tool. The post summarizes the recent history of his inquiry, as well as takes it in far more detailed directions. It's a great primer for first-timers to the subject. Thanks for the great work, Bill.

best

dk


[The graphic at the beginning of this post refers to a series of audio shows collected by Vic. It's an interesting collection, and "Vic's audio shows" are available as podcasts or mp3 downloads.]

Amber Alert

The devil's beating his wife.

Growing up in Texas, this expression described the paradox of a rainshower while the sun was shining. Rain is falling in broad daylight on Wall Street as well, as neither bears nor bulls seem capable of delivering the final death blow.

The problem for the bears is that the selling continues to lack intensity. The problem for the bulls is that price levels are falling like flies.

Stocks gave back solid gains on Monday and the SPX, WLSH, MID and RUT all closed below their 50-day. However, volume was unspectacular. The NASDAQ closed at its lower trendline, but trade was just average, and its 50-day remains untested.

Adding to the mixed picture, leading stocks continue see light selling pressure. The IBD100 slid 0.8%, but just 12 stocks printed distribution days. As bizarre as it sounds to say, this is not normal market behavior at important cycle tops.

That said, this isn't normal behavior at durable market bottoms either. Stocks appear to be headed lower, and the recent market moves have given observant investors plenty of time to adjust risk. The bears are in control, but for them to maintain it, they need serious waves of downside selling pressure.

The NASDAQ gets an Amber Alert tonight as it tests a shaky trendline on deteriorating technical indicators. A date with the 50-day appears to be a given, and a confirmed failure below triggers an extended forecast of foul weather.








In a revealing example of how stocks continue to behave like The Undead, consider the XLF on Monday. As subprime contagion fears swelled, XLF bounced at its 200-day and closed down just 0.8% -- less than the RUT. The Banks were off just 0.4%. XLF is a terrible chart, but buyers continue to step in and rescue it from the jaws of death.







While the SOX looked awful and gave up last week's breakout, the Tech Index slipped just 0.3%, and Transports and Drugs actually closed slightly higher. More examples of The Undead.








Could the VIX have double-topped? In truth, volatility is so meth'd out that arbitrary limits on the VIX are meaningless at this point. Expect wide price swings and choppy trading to continue








While the broader market seems poised for more declines, institutional investors haven't abandoned stocks with the very best fundamentals. This is an unusual sunny spot in an otherwise rainy equity market. It suggests that for now, we're witnessing elaborate profit-taking.

But that could change very quickly.

Until tomorrow, have a great evening.

best

dk

Looking Ahead

A thousand words on the Blackstone IPO are pictured at left. No further comment.

--------------------------------

The pendulum swung the other way on Friday, as the bulls proved no better at follow-through than the bears. Not only was the 60-minute divergence test a dud, the NASDAQ slid 1% on a whopping 35% surge in volume.

In truth, over 1 billion NASDAQ shares traded at Friday's close as part of the Russell rebalance (Global, 1000, 2000, 3000 and Microcap). The rebalance had little effect on Friday's session other than the settlement spike, and Investor's Business Daily isn't even counting it as a distribution day.

The exclusion is fair because NASDAQ trade was tracking 15% lower -- about 1.7 billion shares -- when the closing spike hit. The 1% loss and volume surge were real, but the selling intensity in this back-and-forth market continues to be conspicuously absent.

As the indexes look poised for disaster, leading stocks continue to show few signs of stress. For weeks, the IBD100 has outran the market on up days, and tracked in-line on down days. While the NASDAQ fell 1.4% this week, the IBD100 added 0.1% and is up 19.3% YTD. This bullish divergence will eventually change, but so far, there's no sign of it. In fact, it continued on Friday.

The IBD100 fell 0.9% -- less than the NASDAQ, SPX or Dow -- and 10 stocks even hit record highs. Breadth was terrible market-wide, but the IBD100 did OK. Just one Dow stock closed higher on Friday, and only 1-in-10 advanced on the SPX. However, on the IBD100, 1-in-5 moved up. The biggest problem was that distribution spread to 26 IBD100 stocks. While this is higher than normal, the average decline for those stocks was just 2%.

-----------------------------------

What does all of this mean for stocks going forward?

Everyone wants simple answers, but unlike May 2006, it's a mixed picture. Near-term, the market is clearly weak. However, key strengths are in place that could limit downside risk. Longer-term looks even better, as there are no signs that the global expansion is waning.

Below are 10 observations to help frame the mixed outlook, and help determine what the uncertainty means for your investment approach and time horizon.

1. The market is still split, but the tables have reversed. The NASDAQ now leads the market with a 7.2% gain YTD. This ties the Dow, but it's ahead of the SPX's 5.9% gain. The NASDAQ chart below is weak on many technical levels. However, it's still above key support, including the 50-day and 2530. From a TA perspective, it remains in an uptrend.









2. By contrast, the SPX has acute malignancies and is on the verge of rolling over. While the double-top on the daily has captured everyone's imagination, the weekly SPX shows the double-top playing second fiddle to a bearish expanding wedge. The 40-week is about 4% below. If the SPX spends more than a few weeks consolidating below the red line, it's a whole new ballgame for the US stock market.









3. A key reason the SPX is failing is that the Financials float in a perfect storm of hedge fund woes, higher rates, housing uncertainties and (now) zealous politicians. It's difficult for the market to make headway without the Financials, although it's worth noting that the XLF is still above its 40-week. Expect a fight at support, with 34 as the point of no return.








4. Option investors have gradually shifted their bias to puts. This is unfortunate for the TOF Ratio, which on Friday printed a second, negative EMA crossover. While this crossover was weak and undramatic, it technically triggers a Sell. This rarely ends well for stocks.








5. Speaking of options, the VIX continues to suggest that choppy markets may be around for a while longer. Friday marked the 13th consecutive day that the VIX had an intraday range of greater than 7%. This VIX hyperactivity began with the infamous bond selloff. The fact that it's still going strong even though bonds have stabilized is an indication that hedge fund concerns still weigh heavily on the minds of option investors.








6. The mainstream press is quick to turn oil into a stock villain on a daily basis, but the market says that -- at best -- it's a wild card. Evidence exists that the market has "gotten used" to higher oil (other global markets sure have). On the chart below, oil surges in 2005 and 2006 pushed the NASDAQ lower. However, by Oct 2006, this inverse effect had faded. Now, crude is back to Aug 2005 levels of $70, while the NASDAQ is 19% higher, and the Transports are 33% higher. There's a limit of course, but $70+ crude may not be the stock guillotine it once was.







7. Treasury yields are another bogeyman of dubious repute. Utilities, REIT's, Banks and other rate-sensitive groups are reeling from the shock of a 65-bp move in long yields in just 5 weeks. This clearly couldn't have come at a worse time for the struggling housing market. But the rest of the market -- and the world -- hasn't lost perspective that rates are still very accommodative. For the record, 10-year Treasury yields usually live above the Fed funds rate (green line), so expect yields to keep moving higher.








8. If the US stock market was really poised at the gates of Armageddon, Cyclicals would look very different than the chart does below.









9. Technology stocks are another key cyclical group showing steady strength. The Tech Index slipped half as much as the NASDAQ did this week, and has weathered the recent volatility very well. For more info on the outlook for tech stocks, see Time for Tech?.










10. Finally, on Thursday the guys at Bespoke noted that NYSE Short Interest hit another record high in June. Short interest rose 6% in the past four weeks, and has now swelled an eye-popping 30%! over just the past four months. The shorts obviously have big plans for the SPX.

For more information, 24/7 Wall St. highlights short interest moves on individual sectors and names. It's interesting stuff, and even includes short selling info on Warren Buffet's holdings (+44% jumps in both BUD and WFC). The short sellers are counting on weak Q2 earnings. If they come in OK, expect a fresh squeeze to ensue.


courtesy of Bespoke







The short-term risks for stocks are elevated, and those risks can be catastrophic if you're in the wrong sectors. Meanwhile, the fundamental leadership has been sending a steady message in 2007 that the market isn't on the brink of The Big One.

Maybe not Monday, or next week, or even in the weeks after that, but the market itself is suggesting that stocks are eventually headed higher.

Until Monday, have a great weekend.

best

dk

Complex Oscillations

Although pendulum motion appears simple at first glance, there's actually a lot going on behind the scenes.

Stocks marked the 2007 summer solstice by swinging from Wednesday's slide to a higher close on Thursday. This type of volatility is confusing to investors and tortures technical indicators. However, a closer look at Thursday's action shows that the IT bullish tone persists.

As the NASDAQ traveled 32 points intraday, volume ticked 2% higher, breadth was positive and 3 of every 4 shares traded was a buy. Institutional investors were accumulating shares, and price closed near the highs of the day.

Leading stocks confirm this. The IBD100 rallied 1.3%, twice the NASDAQ and SPX gains and three times the Dow's move. Also, IBD100 breadth was excellent as 78 of 100 stocks moved higher. After a selloff, accumulation in the market leadership is an important tell, and on Thursday, the IBD100 saw 30 stocks move up on higher volume. This is a very solid number, especially in a volatile environment.

For over two months, the bears have been absolutely terrible at follow-through. The chart below shows five tall, red candles during the past nine weeks answered each time by a positive reversal to a higher high. Despite repeated chances, follow-through selling has been nonexistent each time.

As a result, the IT uptrend remains intact, and on Thursday the NASDAQ closed 0.6% below a new, 6-year high. If this high is taken out, that would mark the 5th red candle in nine weeks negated by a higher high.







Short-period charts are notoriously fickle, but an interesting positive divergence has materialized on the 60-minute chart. MACD (3, 7, 4) has a reliable history of identifying short-term price divergences -- up and down. The signals are infrequent -- and occasionally duds -- but the current one is a clean, two-day spread which points to higher prices ahead. It will be interesting to see whether or not MACD (3, 7, 4) produces a dud tomorrow.







By last Friday, the widespread sentiment that stocks were reacting to rising yields was no longer fully supported by market behavior. Today, the 10-year Treasury yield gapped and ran with no negative effect on equity prices. When yields are less than 6% and the market is healthy, yields and stocks generally move in rough parallel.







For the past 4 weeks, the NASDAQ has been outperforming the blue chips, and tech stocks surged again today. While the Dow added 0.4%, the NASDAQ gained 0.7%, the NDX rallied 1% and the Tech Index tacked on 1.2%. In fact, the DJUSTC came 4/100 of a point from recovering completely from Wednesday's selloff and printing a new, 6-year high.

Leading the way for technology were the beleaguered Semiconductors. The SOX gets very little respect, even though today it added 3% to close at a new, 13-month high. There is evidence of an emerging sea change in technology stocks that is receiving almost no mainstream media attention whatsoever. The iPhone novelty has everyone distracted, and the bigger tech picture is going largely unnoticed.








Finally, the TOF Ratio is walking a tightrope, as the 21-day and 50-day stay positive by just a few points. Call buying tomorrow would be a very helpful development.








Pendulum or not, don't let the back-and-forth hypnotize you into not following the ball. As much caution and leeway as the bears deserve, they continue to disappoint with their puzzling lack of downside follow-through.

Despite the eroded technical indicators, leading stocks and the broader market both suggest that higher stock prices lay ahead.

Until tomorrow, have a great evening.

best

dk

Time for Tech? UPDATE

[This post is a follow-up to one I made nine weeks ago, Is It Time to Buy Tech? -- dk]

Still haunted by the epic dotcom crash of 2000, traumatized investors tend to have a near-Pavlovian response to the thought of being overweight in technology stocks.

While this is understandable, the avoidance may soon include an expensive opportunity cost. Tech stocks aren't voodoo -- they're cyclical like everything else -- and there are important signs that a new, cyclical tech Buy signal is in the process of confirming.

Today, the Tech Ratio broke above 10-month resistance to hit a new, 18-month high. This is an important development, and is an extension of a rally off the cycle low in July 2006.

The Tech Ratio is a metric of my own creation that uses the Dow Jones US Technology Index ($DJUSTC) and the NASDAQ. The DJUSTC contains 212 component stocks pulled from all tech sectors and across all market-caps. Because of this breadth, I prefer it to other popular numerators, such as the NDX (70 large-cap-only techs), IXCO (an scduo4fun favorite) and XCI (a Dr. Brett favorite). It's worth noting that the NDX, IXCO and XCI are all giving similar confirmations.

The Tech Ratio appears to have put in a 7-year cycle low this past July. This low was confirmed with a higher low in Apr, and today's 10-month resistance breakout.






The 7-year Tech Ratio chart below shows that while the broader stock market hit bottom in 2002, tech languished far behind for the next 5 years, further burnishing its negative reputation. After bottoming in July 2006, the Ratio is now making a convincing case for a 3-year, inverted H&S. A break above 18-month resistance at 0.238 (dotted line) triggers the cycle Buy signal.







The Tech Ratio confirms that technology is slowly accelerating past the broader market. It's impossible to know exactly when the cycle Buy signal will occur, but it's logical to assume that it will have something to do with strong earnings.

The evidence says that after a 7-year drought, now is a great time to begin a technology shopping list.

best

dk

Taking On Water

Uh-oh.

Stocks took a plunge Wednesday on increased volume, and the NASDAQ notched its ninth distribution day in seven weeks.

Oddly enough, price has held up remarkably well (the NASDAQ is actually up 2.8% since the first sell day). However, it's only a matter of time before the Composite will no longer be able to drive away from a selloff like this under its own power.

A gap up to a new 6-year high, that then reverses into an outside engulfing candle deserves extreme caution. It's the kind of formation that can quickly gain further downside momentum, especially given the weak technical indicators.

However, it's worth noting that the selling on Wednesday had that strange lack of intensity again, especially on the NASDAQ. A look at the hourly chart shows that two-thirds of the price tumble occurred in the final hour of trading, while volume accelerated just 4%. On the NDX, volume actually fell 4%. Big tech names such as AAPL, AMZN, DELL, GOOG, INTC and many others all slipped on lower trade Wednesday.

What does this mean? Hard to say, but leading stocks also held up surprisingly well. The IBD100 slid in-line at 1.6% (the RUT fell 1.4%), while 20 stocks hit record highs. Like the broader market, there was a noticeable lack of selling. In fact, just 17 stocks on the IBD100 printed distribution days. It was such a low number that I cross-checked both the NDX (26 distribution days) and the OEX (24 distribution days). These aren't the totals of broad institutional dumping.

But the selling profile of a market can change quickly. Selloffs have a time-honored history of starting slowly, then gaining speed. Even though the NASDAQ has closed the gap and remains above its 13-day, this is not a market to keep on a long leash. The technical indicators are all sobering reminders of downside risk.







For many weeks, the blue chips have been fairing worse than the NASDAQ, and this pattern continued on Wednesday. The troubling thing about the SPX -- besides a MACD from hell -- is that ever since March, any time the SPX sold off, it rallied to a higher high (green arrows). Unfortunately, this pattern failed on Wednesday for the first time in fourteen weeks (red arrow). Double top?







There was a lot of chatter on Wednesday about bond yields driving the equity weakness. However, the market itself shows a dubious relationship at best. As the market started selling off, yields actually fell, and the 10-year printed a weak, inside day. The Financials took a big hit, but a more likely culprit for this wasn't Treasuries. It was sympathy pains for the demise of the two BSC mortgage-based hedge funds.







Option volatility continues its triple-Venti jitters. Wednesday marked the 12th straight session that the VIX has seen wide intraday price swings, almost all greater than 10%. While the SPX fell 1.4%, the VIX leaped 14%!








Speaking of options, the TOF Ratio is poised ominously above its second negative crossover in three weeks. It's very rare that the market does well when the 21-day can't stay above the 50-day. The last time this crossover pattern occurred, the Feb 27 selloff happened just 9 sessions later.








Finally, the blogger world has seen a strange cluster of negative coincidences this past week, made even more odd given today's selloff (woooooo....) In a bizarre, geeky twist on the Sports Illustrated cover jinx, 24/7 Wall St. published their 25 Best Financial Blogs on Sunday, only to see 5 excellent blogs from their list -- plus one other -- experience "developments" this week:

The chronically ursine Ticker Sense Blogger Poll printed its highest level of bullish sentiment ever! (contrarian bearish?), Yasar Anwar announced a "Permanent Shutdown", Jim Kingsland announced an indefinite summer hiatus, The Kirk Report had a surprise shut down for an unexpected server move, Dr. Brett disappeared, only to turn up hospitalized with acute appendicitis (get well, Dr. Brett!), and finally the non-24/7 Trader-X bids "Goodbye, Farewell, Amen".

Anyone else have something to announce? Sheesh. :)

Once again, the bears are in the perfect position to cue the fat lady and bring this baby home. All it takes is follow-through.

Until tomorrow, have a great evening.

best

dk

The End is Near!

In the new HBO drama, John From Cincinnati, a mysterious stranger with child-like mannerisms arrives in a sleepy, surfing town and repeatedly professes, "The end is near."

He could just as easily be talking about the stock market. Everyone knows that the prophecy is true, it's just that no one knows what "near" means. One thing for certain is that for stocks, "near" slipped further into the future on Tuesday.

For all the bearish bluster and weak housing data, selling pressure continues to be very unfocused. For the second straight day, a sharp opening selloff was met almost immediately with buying pressure. This time the NASDAQ managed to protect a positive close on a 12% pickup in volume.

Perhaps the most troubling thing for the bears is that the stealth rally continues to rumble higher. Tuesday marked the 5th consecutive day that the IBD100 has outpaced the broader indexes. On a flat market, the IBD100 surged 1% as 70 of 100 stocks posted gains. Also, an impressive 30 stocks tagged record highs. While the NASDAQ has gained a scant 16/100 of a point in the past two days, the IBD100 has surged 1.6% higher.

Confirming this stealthy strength are the market internals (see charts). While Up/Down Volume was negative on the NASDAQ, all other internals on both exchanges were positive on Tuesday. As crazy as it sounds ("The end is near!"), based on recent trading patterns in leading stocks and market internals, stocks appear poised to move higher soon.

If an index isn't gonna move higher, the chart below is definitely the way to move sideways.







Besides leading stocks and market internals, other evidence is pointing to higher stock prices as well. The section below discusses how Treasuries, Banks, the VIX, foreign markets, and options all suggest that more gains lay ahead for the US stock market.

--------------------

On Tuesday, yields fell, Banks rose -- and the stock market yawned. Stocks will eventually wake up to implications of these moves, but meanwhile the 10-year Treasury yield filled the second of its three gaps.

It's hard to imagine the 10-year acting with such mathematical perfection, but it's worth pointing out that filling the third gap below would also coincide with a 62% Fib retrace. Fun to consider, but don't hold your breath.

In the past 8 sessions, yields have now fallen 0.6%, while the Banks have gained 3.1%. This confirms what the market leadership was saying all along: the stock market is far less concerned about the jump in yields than was first thought. This, of course, is good news for stocks.









The VIX continues its jittery decline, which generally fills the sails of the stock market. There's an acceleration of interest in the VIX and option-related volatility, and I urge readers to keep up with VIX and More and Daily Option Report for the latest developments.







In the past two days, Hong Kong, Taiwan, Singapore, Seoul, London, Germany, Brazil and Mexico have all rallied to fresh, all-time highs. Meanwhile, Shanghai, Tokyo, Australia, India, France, Italy, Netherlands, Austria, Spain and Toronto all sit within 3% of new all-time highs (most are much less).

Below is Tuesday's spectacular -- and long-awaited -- Hang Seng breakout. It's an event that many view as particularly bullish for the world markets. It's also a picture-perfect resolution to an inverted H&S.








Finally, the TOF Ratio continues to strengthen as option investors pick up calls.








At this juncture, it would be foolish not to advise caution. However, the evidence suggests that while the end may be near, it's not here yet.

Until tomorrow, have a great evening.

best

dk

Stealthy Strength

While the broader market paused on quiet trade Monday, leading stocks stealthily charged ahead.

In a sign that sellers remain scarce, the NASDAQ closed flat as volume tumbled a whopping 28%. Low-volume sessions offer great opportunities for bears to gangtackle prices lower. However, the opportunity slid by as institutional investors saw little reason to unwind their positions.

As a result, even though market internals were slightly negative and oil edged higher, the SPX spent the day trading in a 5-point range. This type of quiet consolidation is textbook behavior after last week's big move.

In fact, Monday's calm masked the fact that, beneath the surface, the rally rumbled on. Not only did News Highs trounce New Lows, 428-90, but the IBD100 had a field day. It tacked on another 0.6% as 52 of 100 stocks moved up. Even better, an impressive 34 stocks hit record highs. Not bad action for a day that saw the RUT slip 0.2%.

The technical indicators on the chart below describe an index that appears low on gas. MACD, stochastics, ADX, OBV and MFI have all seen better days. However, price stubbornly refuses to cooperate and move lower. The bullish perspective is that the market has just experienced an 8-week "mini-correction", and has now begun a fresh leg higher. Leading stocks are certainly suggesting this, as are options, the VIX, bonds, market internals and foreign markets.

If price does continue higher, ironically the "out of gas" indicators below suddenly become indicators with "room to run". Of course if this happens, countless individual investors' skulls will explode, but that's another story altogether.








Treasury yields slid another 3 BP on Monday, but equities were very ho-hum about this development. If this seems odd to you, consider this fishy stat: in the past nine sessions, as Darth Yields climbed 3.4%, the Banks have climbed 2.7%!

If you throw in the positive yield curve and new NASDAQ high, the evidence mounts that the recent bond selloff wasn't driven by concerns of a Fed policy change or some unexpected inflation debacle. Instead, the bond market is adjusting itself to "no recession" and continued economic growth. Given the recent equity gyrations, it's ironic that both adjustments are good for stocks, and helps explain last week's stock rally.

The BKX and 10-year are included below. For the record, the days of yields with a "4" handle are probably over, but this shouldn't trouble the stock market significantly.









Two weeks ago, I mentioned that backtesting the TOF Ratio revealed that the first negative crossover produced a warning sign, not a Sell signal. This seems to be the case yet again. Call buying produced a positive crossover for the TOF Ratio on Monday, and the Ratio looks poised for more improvement.








Housing woes will be center stage on Tuesday, and it's unlikely anyone is expecting good news. Though the mainstream press will likely blame any market weakness on putrid housing starts and permits, look for better causes.

Also, look for heavy selling. For now, there are few signs of a market top, but tomorrow's a new day.

Until then, have a great evening.

best

dk

The Bull Lives On

Despite six weeks of effort and a lethal arsenal, sellers were unable to deliver the kill shot this week. As a result, the major indexes escaped into the sunset on Friday.

Well, actually the NASDAQ bolted to a six-year high on a 26% surge in volume!

While it's tempting to give Friday's big volume a Quad Witch asterisk, remember that real money was used to trade those shares. Option expiration or not -- and even during OE selloffs -- all volume counts.

Frustrated sellers are "blaming" a familiar list of nefarious causes for this week's rally. Tainted inflation data, PPT intervention, global liquidity, the "sheeple" effect and even Bradley turn dates are each taking their turn on the dais of shame. However, the real reason for this week's surge is far more interesting:

The selling dried up.

When things are bad, there is never a shortage of stock for sale. However, for the past 9 weeks, each time that shares flooded the market, buyers stepped in to scoop up the inventory. In fact, NASDAQ 2530-ish (chart below) has been tested 10 times since April. Each time support held, culminating in the dramatic Triple Support test on June 8. Five sessions later, the Composite tagged a new, 6-year high.

This isn't the market action of amateurs. Investors have had ample opportunity to weigh in, and something's clearly going on here. Based on the market's behavior since July 2006, that "something" is probably simple and familiar: the upcoming earnings season will be solid yet again.

The stock market is a selfish, one-trick pony. Treasury yields, gasoline, housing, China, the dollar -- you name it, it only matters if it does one thing: impacts earnings. As long as corporate earnings are OK, stocks will eventually keep going up. Heaven help us when earnings finally disappoint.

At the daily level, the chart below shows that nine weeks of brutal consolidation have left the major indexes with significant technical damage. The most glaring is MACD. On the NASDAQ, eight direction changes since April(!) have caused this momentum indicator to diverge from price. For MACD to heal, a break above the dotted downtrend line is a critical first step.









The weekly chart smoothes out the volatility and shows a much clearer picture of just how bullish the market really is. Notice that momentum has continued to climb, while the 10-week line was tested in 4 of the past 5 weeks. This past week saw a record high on a bullish engulfing candle. Throw in stochastics and this is a very nice-looking chart with room to run.









Even in the financial markets, humans need a steady parade of disposable villains to help process fears of the unknown. 2007 has seen the housing crisis, inverted yield curve, Chinese stocks, higher oil, Q1 earnings and sell-in-May each take their turn in the barrel. The result of these threats is an 8.8% gain in the NASDAQ.

Now, rising Treasury yields are the Vader de jour. The chart below shows that all yields have done over the past five weeks is return to where the Fed left them a year ago. The market was shocked by the abrupt change, but that surprise won't last. Rates remain historically low, and the FOMC continues to have little reason to change policy in either direction.

Considering Friday's new NASDAQ high -- and the wick below -- investors have already begun the process of shopping for a new villain.









A classic candidate for New Villain is energy. Oil finally broke above 12-week resistance with no hurricanes in sight, and energy stocks are under accumulation.








The VIX appears to have given another Buy signal this week. Even though the bond debacle saw the SPX slip just 3.4%, options volatility completely lost its mind and the VIX popped 36%. Time to try decaf?

There's an interesting volley going on between Adam at Daily Options Report and Bill at VIX and More about the near-term future of the VIX. Adam feels a return trip to the single digits is in store; Bill lays out a great argument of how this is unlikely. Though Adam's take is historically more favorable for stocks, recent VIX performance tips the debate in Bill's favor. Both of these guys are very good, but regardless of who is correct, the Sharapova/Ivanovic pics make the debate worth following. :)









Finally, contrarian bullishness is alive and well, as the 6-year NASDAQ high appears to have succeeded in making investors even more bearish. Despite impressive internals, soaring market leadership and record highs, the AAII Bull Ratio ticked lower. Also, across the web, head-n-shoulders chatter has now morphed effortlessly into "abandoned baby" warnings! This rally continues to offer very little pleasure for the average investor.

Dr. Brett has published a two-part series called, Trade Like a Scientist. It's a learned, critical version of "follow the ball" (sort of), and in a market like this, it's a worthwhile read.

It's a beautiful weekend in Los Angeles and we've been enjoying the sun today. Pool party tonight!

Hope you're having a great weekend.

best

dk

Anybody Scared?

In what may prove to be a key plot twist, higher producer prices, steady yields and a jump in oil failed to scare away investors on Thursday.

Instead, the NASDAQ gapped and ran 17 points. Even though volume slid 5%, strong market internals suggest that the shorts were the group that got religion on Thursday.

If tomorrow's CPI resembles today's PPI, the bears have good reason to be skittish. A decent CPI is a big "if", but not only were the internals strong on Thursday, the market leadership continued to pound it home as well.

The IBD100 more than doubled the NASDAQ's gain with a 1.4% surge. As 80 of 100 stocks moved higher, a solid 22 hit record highs and 28 saw accumulation. In all, just 4 stocks experienced any selling pressure. Investors buying the market leadership aren't acting worried about Friday's inflation report.

If the bulls have anything to be scared about, it's that the chart below is so technically wobbly that it's one that only a mother could love. Consolidations make all charts look ugly, and this one is no exception.

If Friday is a down day greater than 25-28 points, the Composite prints a bearish head-n-shoulders. As if that weren't enough, the descending MACD means that price has no momentum, leaving it susceptible to further convulsive moves.

If the chart is printing any advantage, it's that since price first broke above the upper band 14 sessions ago, it's closed there 9 times. For all the distribution, sellers have been unable to keep price down in the box.








The photo at the top of this post contains a deliberate tinge of irony. Regardless of what the brave words say, those eyes show fear. lowrisk.com published its latest Investor Sentiment index Wednesday night, and it reported a Bullish level of just 14%! Since 1997, lowrisk Bullishness has been this low only 7 other times. Individual investors are scared.

Meanwhile, the NASDAQ sits just 1% below a new 6-year high! Historically, investors are rarely scared at market highs. Instead, they grow braver and more bullish. Statistically, scared investors have moved to cash and bullish investors are all in. That's why extreme bearishness at market highs is contrarian bullish. Investors aren't "all in", and the fuel exists to push stocks higher.

In a great post, Babak over at Trader's Narrative examines the lowrisk indicator today. In a nutshell, he points out that the accuracy of the lowrisk indicator benefits from smoothing via moving averages, and timing can be off a few weeks, but big sentiment extremes are useful contrarian indicators. Few get bigger than the one below.






The TOF Ratio picked up steam today as option investors shifted to calls. The Ratio is now a little hot, but during Quad Witch the Put/Call can spin like a compass in the Bermuda Triangle. For now, it's just good that it's pointing north.






A look across the charts tonight reveals an absolute forest of head-n-shoulder setups. Even though the bears have blown countless opportunities in recent weeks, they get another chance at redemption tomorrow. As luck would have it, it could be their biggest opportunity yet.

If the market sells off significantly -- about 1% or more -- countless charts will suffer technical damage possibly requiring weeks of repair. On the other hand, a big accumulation day clearly adds to the woes of the bears. The ongoing technical advantage for the sellers is that many indicators -- especially MACD -- are very weak.

If you add it all together, the overall advantage tips ever so slightly to the bears again tonight -- but they're on borrowed time.

Tomorrow should be interesting, and until then have a great evening.

best

dk

Fashion Update

Beige is the new black.

Five weeks of runaway Treasury yields have brought the equity markets to the brink of disaster. In fact, higher yields have done what Chinese bubble fears and $3+ gasoline could not. However on Wednesday, ho-hum inflation data from the Fed's Beige Book calmed some very frazzled investor nerves.

At least for now, beige is Wall Street's new favorite color.

Sparked by the Fed data, stocks staged an impressive afternoon rally. In fact, the NASDAQ closed at its absolute highest print of the day on a 5% pickup in volume. The market internals were bullish all day, even as the market meandered for hours ahead of the Fed report. If you want to know which way a static, sideways market is likely to break, check the market internals for clues.

A look at the charts tonight shows that the internal bleeding has stopped. A lot of work lays ahead for the bulls, but Wednesday was an important first step.

The predictive value of bullish gravestone dojis and the IBD100 gained some street cred as well on Wednesday. While the broader market has convulsed for weeks, leading stocks remained surprisingly sanguine. 7 distribution days in 23 sessions produced exactly one day of selling on the IBD100.

This has been a weird disconnect, but markets rarely fall apart while the fundamental leadership remains healthy. For the record, the IBD100 outpaced the market higher on Wednesday, adding 1.6% on excellent internals. 31 of 100 stocks printed accumulation days, a solid stat considering yesterday's 29% jump in volume.

The NASDAQ followed-through on Friday's test of triple support (green arrow), and the bears have now let an easy kill slip away. However, hidden in plain sight is the very real threat of a bearish head-n-shoulders. The only way for the bulls to neutralize this is to take out the old high on mighty volume. The indicators are providing no help at all, especially the very crappy MACD.

Both the bulls and the bears have been here before, and both sides know what needs to happen. One thing is for certain: it's going to require more than haute couture.

If the chart below were a stock, would you buy? The good news for the bulls is that it's not a stock, and the answer is "no". In fact, after the nasty reversal candle, most investors would point out those three yawning gaps just below. Contrary to popular belief, not all gaps fill. However, if PPI and CPI contain no surprises, this chart will definitely cool down and provide the stock market some relief.

They weren't exactly singing, "ding, dong the witch is dead", but few enjoyed the Beige Book data -- and that nasty yield candle -- more than the oppressed Banks. Technically, the BKX remains hospitalized, but at least it's above its 200-day. The green line is the old all-time high.

Finally, the TOF Ratio enjoyed the benefit of Wednesday's colorful Fed data as well. Option investors weren't impressed by the morning's retail data, and spent most of their day buying puts. As a result, the TOF Ratio looked dreadful -- until about 2pm. The Beige Book succeeded in changing opinions, and investors shifted to calls.

The TOF Ratio is once more in perfect position, and Stochastics moving above 20 is particular encouraging.

The market is utterly inflation-obssessed, and what happens next is totally dependent on the PPI and CPI data. Any negative surprise in these two reports will produce a horrific relapse in the stock market.

Given the high yields and the crop of distribution days, the advantage is still tipped in the bears' favor. But they need help -- quickly!

Until tomorrow, have a great evening.

best

dk

Warning Signs

"In four hours, she's gonna blow, Captain."

---- Mr. Scott, from The Savage Curtain (Episode 77)

I walked by the Merrill Lynch office today, and there was a broker standing on the sidewalk handing out pieces of paper. I took one and saw that it was a 10-year Treasury note. They were giving them away today!

Apparently, no one wants bonds any more, and on Tuesday they continued their free fall. The 10-year Treasury yield surged to 5.25%, and is finally back to where Bernanke left rates a year ago.

Stocks were not happy about this, and found themselves hopelessly dominated by the whims of bond traders. Moving in inversion to yields, the NASDAQ reversed direction twice on a whopping 29% surge in volume.

The intraday chart below shows that when bond yields zigged (blue), the NASDAQ zagged (black). This whipsaw action is fun for day-traders, but to everyone else it felt like a bear-trap followed by a bull-trap.







Not that anyone's counting any more, but Tuesday also marked the 7th distribution day in the past six weeks. As a result, market internals were awful yet again, and the deteriorating charts are worth a look at tonight. All ten sectors closed lower on Tuesday as the weakness was widespread.

However, in a very bizarre twist, as Rome burns, leading stocks continue to play on. The IBD100 fell 1.4% -- the same as the RUT -- but on selling pressure that was light for the third straight day. While the declines were real and breadth was terrible, just 16 stocks printed distribution days. Institutional investors continue to hang on to the market leadership.

This is very odd, and on the whole, the IBD100 continues to look OK. In May 2006, the IBD100 was a portrait of misery, and tonight it looks nothing like that. In fact, it's acting like it did in February. February saw a violent move in the broad markets, but the IBD100 held steady. The February correction turned out to be very brief, and it will be interesting what the current IBD100 strength might mean this time. Of course, for it to mean anything, the strength has to last.

The IBD100 may look OK, but the NASDAQ certainly doesn't. On Tuesday, it parked itself exactly on the 3-month price channel. A break below 2535, and the odds say that it's all over for a while.







If the chart below were a stock, some investors would be screaming "exhaustion gap!" and "short that pig!" However, as with any security, new highs tend to beget new highs, and yields are no different.

Bonds are caught in the grip of unwinding derivatives. Rationally, buyers "should" have stepped in by now and driven yields lower. However, the bond market is no longer rational and is acting very out-of-character. Large and mysterious financial instruments are being unwound, and for now, the fat bond beyatch has yet to sing. Maybe tomorrow she'll start warming up her pipes.







Brunhilde better get started, because -- as nastar pointed out -- the 5-10-20 Timer tags a Sell tomorrow unless stocks rally. One shred of bullish news is that tonight's candle is a loose, gravestone doji bullish. This is a reversal pattern , but it has low reliability, and it's been approached unconventionally. However, if bond buyers step in tomorrow, the 5-10-20 Timer just might dodge a bullet.








The market is obviously weak, but it's also given investors every conceivable chance to get out of the way. The current slide has been the worst-kept Wall Street secret in recent memory.

Tomorrow, investors see Retail Sales data and the Beige Book. In this environment, who knows how the market will react?

Until then, have a great evening.

best

dk

Quiet Day

The picture on the left is the entire stock market on Monday; on the right is everyone trading AAPL.

The major indexes answered Friday's romp by closing mixed on a sleepy Monday. Sellers were scarce, and the NASDAQ slipped just 1 point on a 13% fall in volume. The blue chips even managed to edge a little higher. Since bond yields rose again and M&A announcements were few, Monday's action was a net positive for stocks.

Adding to the positive tone was that while the market dozed, leading stocks bolted decisively higher. The IBD100 gained an impressive 0.8% as 65 of 100 stocks moved up. Also, 14 stocks hit record highs, up from just 5 on Friday. The volume on the market leadership picked up as well. On a quiet day overall, a solid 25 IBD100 stocks saw Accumulation, while Distribution fell from 8 stocks on Friday to just 6 today.

Unfortunately, one of those 6 selloffs was AAPL, which pulled a "sell-the-news" during Monday's developer's conference. Arguably the NASDAQ's leading stock for the past 6 weeks, AAPL selloff mojo spread to the entire Composite, which gave up its gains by the close.

The chart below shows the significance of Friday's bounce to both bulls and bears alike. The NASDAQ rallied Friday off of triple support. The 3-month trendline, 8 week band support and the 50-day EMA all intersected at Friday's low. This is strong stuff, but the bears have stepped it up a notch as well. If they take out this triple support, it could be a long, hot summer for the bulls.






The TOF Ratio is on the warning track. Unlike the IBD100, it's shown few signs of life as option investors see little reason to be bullish.







While there's been little distribution for the past two sessions, the market is technically wobbly. In addition to Quad Witch, the market gets retail sales, Beige Book and key inflation data this week. Any of it can fuel volatility -- especially PPI and CPI.

The future isn't written and the uptrend remains intact, but for the now there are elevated risks are to the downside. Make sure you're comfortable with your exposure.

Until tomorrow, have a great evening.

best

dk

Nice Bounce

After three days of heavy selling, stocks bounced back on Friday.

While the white candle was impressive, the 18% drop in volume meant short covering and bargain hunting drove the action. Considering everything that happened in the global credit markets this week, the bears now have the ball. As always, for this weakness to really stick, the sellers need follow-through.

The market internals snapped back on Friday, as did the IBD100, but neither gave stellar performances. The IBD100 added just 1.1%, lower than the NASDAQ's 1.3% gain. After three days of damage, only 5 stocks on the IBD100 made it back to record highs, although distribution did fall from 41 stocks down to just 8.

The chart below shows that a war is being fought within a narrow, 50 point band on the Composite. The red arrows mark the four biggest distribution days in the past 7 weeks. Each time, the sellers ran out of gas and were unable to push prices lower. The problem is that the buyers couldn't push prices higher either.

This time however, the bears have four new advantages: higher yields, wobbly market leadership, strong put buying and the summer doldrums. If the bears can't make something out of these four horsemen, they really have some 'splaining to do.








For all the weakness and bond shenanigans, sellers have failed to pin the NASDAQ at its 50-day for six straight weeks. It looks like they'll get another chance, but for now the IT uptrend still remains intact. From the looks of things, one more bad week for stocks and numerous technical indicators will flip negative.








Less shackled by financial stocks, the NASDAQ outperformed the blue chips this week. Much of the strength was centered in technology, and the Tech Index outperformed all the broader indexes this week. There's more going on here than Jim Cramer, and tech is a sector to keep your eyes on.








After 17 days on the road, I'm thankful to be back home again. I'm looking forward to a home-cooked meal and my own bed, so I'm cutting it short this evening.

Until tomorrow, have a good one.

best

dk

Ouch!

It's all fun-n-games until somebody pokes their eye out.

Stocks took a thunderous shellacking on Thursday, and like a bad smell, the selling permeated everything. For the third straight day, all ten stock sectors fell, though today it was especially bad.

The much-discussed bond debacle meant that the financially-heavy NYSE had it worst of all. Though its price and volume action were terrible, the NYSE internals showed just how bad it really was. Just 8 out of 100 stocks on the NYSE closed higher, while only 6 of 100 shares traded was a buy. Out of the 3,300 NYSE stocks, a measly 40 hit record highs. It's been a long, long time since market internals on any exchange have been that lopsided.

Another bearish development is that the TOF Ratio saw its first EMA crossover on the same day that IBD100 finally saw strong selling. According to Investor's Business Daily, the IBD100 fell 2.8%, but my tracking portfolio clocked it 3.3% lower. Like the NYSE, just 6 stocks moved higher, but the zinger was that 41 of 100 stocks printed distribution days. Institutional investors are starting to dump the market leadership.

When a chart sees this type of technical damage, it usually take a while to recover. Fundamentally, the yield leap has done what two Chinese selloffs and rising energy costs couldn't. The market is spooked, and both TA and FA have noticeable stress fractures. Time to be patient.







The market performance was so poor and widespread on Thursday, that most charts share a similar look of horror. About the closest we get to "warm and fuzzy" is that some indicators are getting so bad, that they're almost good.

Since this market has been notorious in its ability to whipsaw, a look at important indicators nearing extreme levels of "badness" may offer some perspective. These indicators work best when the market is oversold -- which it's not yet.

First, the NYSE Hi-Low Index shows just what a poor day it was. As a result, notice that it spiked to levels not seen since July 2006. The fall has been so abrupt that the 10-week still isn't even at a Sell.







The TICK chart is also nearing what has proven to be recent cycle lows.








Option volatility has the VIX leaping way out of its Bollinger banks. It's unusual for it to remain this way for long.







Finally, the chart that made grown men cry. Also a bit stretched out of its banks.







I've described many times that selloffs are incredibly helpful in deciding what's worth owning. Wheat is being separated from the chaff right before our eyes. If you've adjusted risk properly, you can really enjoy the process.

Be patient, and for heaven's sake, sell anything seeing distribution. Selloffs are no time for hope.

Until tomorrow, have a great evening. And perhaps a cocktail.

best

dk

The Big Leap

A couple of monster fish -- the VIX and TNX -- are leaping way out of their Bollinger banks today. Have they developed lungs?

The stock market is currently giving them the benefit of the doubt, but a lot of trading lays ahead.

best

dk

More Selling

Stocks got whacked again on Wednesday, but the damage was nowhere near the rate-hike bloodbath Europe saw on the 63rd anniversary of D-Day.

The US market is clearly taking on water, but the selling has curiously lacked that sense of gut-wrenching panic. Selling can start off slowly and gain momentum, so caution is very important moving forward. However -- and I'm certainly no Pollyanna -- Wednesday's action looked like profit-taking again.

Volume lacked intensity, and even closed mixed. While trade picked up 1% on the NYSE, it slid 4% on the NASDAQ. The Dow and SML notched their second straight distribution days, but the broader SPX and WLSH eased on lighter trade. Overall, the NASDAQ held up better than the blue chips. Even the NASDAQ internals were noticeably stronger than on the NYSE.

The IBD100 had the look of profit-taking as well. It fell 1.4%, more than the NASDAQ, but it was near the 1.2% slip on the more cap-relevant MID. Also, breadth had an interesting twist. While just 15 IBD100 stocks moved higher, only 13 NDX stocks and 5(!) OEX stocks posted gains.

But the real asterisk continues to be the lack of selling pressure on leading stocks. Remarkably, against a sea of red ink, just 14 stocks on the IBD100 saw distribution. This follows just 9 stocks that saw heavy selling on Tuesday. This is an atypical stat, and it will be interesting to see if it has any predictive usefulness.

In a final sign of profit-taking, all 10 market sectors closed lower on Wednesday. Institutional investors weren't defensively rotating into "safer" sectors (even the XAU fell). They were sweeping it off the table, and doing so on unconvincing volume.

But that was Wednesday. Thursday and beyond is all that matters now, and the chart below has taken some technical hits. The NASDAQ remains in an IT uptrend, but if it spends much time below 2575 it could get very messy near-term. The growing MACD divergence is not a good sign.







Option investors have lost a lot of faith in this market and have assembled a pile of puts. This has worn down the TOF Ratio. Though this assessment isn't officially sanctioned by TOF, I've found that the first touch/crossover is more of a warning (orange arrow). Afterwards, the market will often resume moving higher. However, the second touch (red arrow) is less forgiving, and that's the important Sell signal.








In a new article published Wednesday, Mark Hulbert points out that even after this week's selloff, contrarian analysis insists we aren't anywhere near an IT top. The HSNSI is 6 points lower than it was a month ago, even though the Dow has gained 300 points! As stocks climbed, the pros became more pessimistic. This is consistent with last week's AAII Bull Ratio, which saw retail investors express levels of bearishness not seen since the Feb 27 selloff.

Though investors continue to be described as too complacent, the evidence points to considerable fear in this market. If the put buying, short interest, QID volume and investor sentiment aren't persuasive enough, consider the VIX.

The VIX popped a nut on Wednesday and vaulted above its bands. While the SPX has slipped just 1.5% below last week's all-time high, option volatility shot up 21%! Option traders are unusually skittish, and appear to be fashioning a worst-case scenario. Fear is good, and lots of fear is even better. The chart below may have contrarian bullish implications for stocks near-term.





As I write, Asian markets are down. Also, Europe is very grumpy about their shiny new rate hike, so don't expect much help from them on Thursday. Treasury rates, inflation, June gloom...all-in-all, there are lots of reasons for more selling near-term.

Stay within your risk envelope, but remember that the odds continue to favor holding positions that aren't experiencing distribution.

Until tomorrow, have a great evening.

best

dk

Buying the Dip Continues

Well, they sure aren't making distribution days like they used to.

In what first appeared to be a grim development, stocks moved lower on Tuesday as NASDAQ volume swelled 19%. The Dow shed 125 points, and making matters worse, market internals were pathetic.

The only problem for the bears is that the sellers disappeared at lunchtime, leaving the Composite to rally 17 points and close off just 0.3%. The NDX actually made it back to unchanged. The dip-buyers strike again.

Technically, Tuesday marked the 5th distribution day in 5 weeks. However, the NASDAQ is actually 3.3% higher since then. The selling pressure is there, but oddly enough, it's producing no lasting damage. Tuesday's reversal reduced a promising distribution day to little more than profit-taking.

We know this because the fundamental leadership saw such little selling. As the broader market slid, the IBD100 held its own. It closed off just 0.2% as a respectable 44 of 100 stocks moved higher. Also, an impressive 19 stocks printed record highs, a large number for a down day. However, the real tell was that just 8 stocks on the IBD100 printed distribution days.

This is a remarkable stat, and it speaks volumes about Tuesday's action. It would be extremely unusual for a rally to be over while the very best stocks are still under accumulation.

The chart below has flaws, but it continues to keep itself together. For now, the NASDAQ is doing little more than consolidating.






All consolidations produce casualties, and it's particularly troubling that the Financials have drawn the short straw. On Tuesday, the Banks slipped back below their 50-day, which is bad enough. However, the bigger problem is that the XLF is printing a 7-week MACD divergence.

For many reasons, the entire Financial sector has lost momentum, and this will serve as a drag on the markets going forward. How big of a drag is hard to say.






When we went to bed Monday night, Shanghai was selling off hard yet again. However, as we slept, the Chinese turned things around in a big way. The SSEC reversed direction at 3400 and rallied 11% to close back above its 50-day.

Because the Chinese economy on fire, it's unlikely that the SSEC is done making new highs. How it gets there is something else altogether. Looking at the chart below, I wonder how average Chinese investors are processing this volatility.






For now, the odds favor the market eventually pressing higher. There's certainly a substantial wall of worry for it to climb.

Today was also a great example of the importance of monitoring the volume on stocks you own. In this market, low volume dips on quality stocks tend to bounce back.

Until tomorrow, have a great evening.

best

dk

Market Bubble: An Eyewitness Account

With all the chatter about a Chinese stock market bubble, I've thought many times about the bubble I experienced first-hand.

Exactly 10 years ago -- in May 1997 -- Gary Kasparov played an epic chess re-match with IBM's Deep Blue. At our shop, work ground to a halt as we all watched that re-match live on our computers via something called a "Java-enabled" chess board (FYI - it didn't work very well).

These were also the glory days of CSCO. I followed Peter Lynch at the time and felt nervous about the prospect of owning CSCO. I didn't understand the company very well, though I knew they were making a lot of money and several friends at work owned the stock. So -- throwing caution to the wind -- during the Kasparov/Deep Blue chess re-match I bought my first shares of CSCO.

As the chart below shows, there was no "sell in May" in 1997, and CSCO rallied a whopping 80% that summer. After a rough fall, the NASDAQ added another 26% in four months, pulled back, and added another 18% in just four weeks. Then, in June 1998, it did the impossible: the NASDAQ broke above 2,000 for the first time ever -- into the Death Zone!

The NASDAQ had now climbed 66% since the Kasparov chess match -- but my CSCO had gone up 240%! I didn't follow the market every day back then (thank heavens), and you can imagine my surprise in learning what a stock-picking genius I had become. In June 1998, the stock market was obviously heading higher.






Yeah, right. The NASDAQ pulled back in Jul 1998 (huh?), and then kept pulling back. I got burned at this point because I stopped following the ball. The market was digesting its first hedge fund melt-down -- Long Term Capital Management -- and things went from bad to worse. I was out by then, but in Oct 1998, the NASDAQ shed 20% in just nine sessions. Even worse, CSCO fell 40% in the same nine days!

This was a terrible time, though it taught me to watch the market more closely. By fall 1998, most felt that the NASDAQ was headed back below 1,000, and the great US Bull Market was finally over. Having lost a lot of my gains, I was very gun shy. The chart below looked very bearish and I was in no mood to buy.






Of course, the NASDAQ unexpectedly shot up hard, though prudent investors remained very skeptical. It was first explained as a "dead cat bounce", then at 1650 it was a "bear flag"; at 2000 (the Death Zone!) it was a "double top". However, it kept going and going and in just 4 months the NASDAQ had rallied an eye-popping 88%! CSCO soared 130%, and thankfully I caught some of the move.

Then, at 2500 the NASDAQ hiccuped. It was Feb 1999, and the great US Bull Market was finally over (really this time). After running so hard, so fast, the market was going down. I sold my CSCO.






Wrong! Investors bought the dips and the market climbed 26% in nine choppy months (I got back in). However, at 2900 after a 140% run in just two years, the great US Bull Market was finally over (really this time...and I mean it). At long last, the bears were in control, and this time it was for real: the market was going down. I wisely sold my CSCO.






Wrong! Instead, the NASDAQ soared an brain-bursting 80% in just five months (I got back in). In less than three years, the NASDAQ had now climbed 300% -- and CSCO had soared 1,300%. In early 2000, the bears were almost extinct, and clearly the only smart thing to do was to be long.






Of course, the rest is history, and the NASDAQ gave back 4,000 points in the next 2 years! Bubbles turn idiots into geniuses, then back into idiots again. However, even with all of my mistakes, I did very well with CSCO. By 2000 I was an avid follower of the IBD100, and it fell apart massively in Mar 2000. Investor's Business Daily kept publishing harsh warnings thereafter and (thankfully) I stayed out. In summer 2000, I left for a couple of months in Japan and watched it all from a distance -- and all in cash.







Though many call the current US stock market a bubble, it certainly doesn't resemble one from a historical -- or personal -- perspective. The current market is incredibly cautious, and a 35-point NASDAQ move brings out choruses of "manipulation!", "sheeple!" and "plunge protection team!" I often wonder what message boards would look like today if they saw the NASDAQ vault 2,100 points in four months.

China is another story however, and they may get a chance to see such a thing. If so, they'll likely learn that calling a top is much, much harder than it looks, and calling a bottom is even worse.

Bubble or not, the Chinese still have their most important lessons ahead of them, and I'm glad I've already taken the course.

best

dk

Shanghai Dodged Again

On Monday, Shanghai investors learned that Chinese stocks (not pictured at left) eventually get a little uncomfortable.

Monday was also the third time since Feb 27 that Shanghai tumbled but the US markets held their own. The Chinese economy is woven throughout the US financial system. However, the Chinese stock market isn't. The SSEC is closed to outsiders and isolated from the world markets, and it showed in Monday's trading. As Shanghai tumbled 8.3%, Australia, Singapore, Taiwan, Brazil, Austria, Spain, France, Germany, London, the NYSE, WLSH and MID all notched record highs. Also, Chinese ADR's trading in the US held up remarkably well.

US trading volume was low again, but the market internals were strong for the 6th straight day. As sellers continue to be scarce, New Highs crushed New Lows 545-73.

Leading stocks also continued their streak. The IBD100 outpaced the broader market for the 6th consecutive day, adding 0.8% as 67 of 100 stocks moved higher. Also, a hefty 25 stocks printed record highs. With this type of ongoing performance from stocks with the very best fundamentals, it's unlikely that the broader market has put in a top yet.

The NASDAQ closed one gap today as various technical indicators continue to point higher. The white candle is another promising sign.






There's considerable debate about whether the looming 5% 10-year Treasury yield will spark an important selloff. For now anyway, the market itself seems to be saying that 5% is not the magic number. Utilities are taking higher yields hard of course, but the Financials are holding up well.

Even more revealing, Retail and Housing seem particularly unperturbed. Against both the yield rally and high energy prices, the RLX has posted gains in 10 of the past 13 sessions, and now sits just 0.5% below an new all-time high. The Housing Index has also stayed strong, and seems poised to break out of a 7-day bull flag. It appears strong employment data is trumping concerns about 5% yields.

If 5% Treasury yields were truly kryptonite, the RLX and HGX wouldn't be behaving this way. Both are included below.







On the cusp of hurricane season, energy stocks continue to act bullish. The WTIC below shows that $67 crude is a critical line in the sand. Technically, a break higher seems almost inevitable. If/when this happens, crude will likely rally for quite a bit higher, and oil stocks should benefit.

A summer crude rally has the potential to create more problems for the stock market than 5% Treasury yields. 5% yields are historically low; $75 crude is not.






While the indexes continue to look like they can move higher, they also show clear signs of wear. The problem for the bears is that vast numbers of individual stocks don't share that haggard look. A look through watch lists, index components and stock screens shows a majority of stocks under accumulation. This is why the internals have improved so much since mid-May.

Throw in the strength in leading stocks, and it all adds up to a continued pattern of dip-buying. Eventually it will stop of course, but the market will be acting differently by then.

Until tomorrow, have a great evening.

best

dk

Market Breadth: Does It Really Matter?

Of all the "market internals", breadth is certainly regarded as the most significant. If the market is climbing, it's always healthiest when a growing number of stocks participate in the rally. However, using advancers vs. decliners to monitor the health of the stock market has also been curiously steeped in controversy for years.

The problem boils down to this: NYSE breadth has proven to be very reliable and has always behaved "rationally" , while NASDAQ breadth has been equally unreliable and -- by some metrics -- essentially useless for over a decade.

Serious technicians analyze breadth in "cumulative" mode. This method simply plots a running sum of advancers-less-gainers. Since 1969, Sherman and Tom McClellan have used cumulative A/D to calculate their famous McClellan Oscillator as well as their NASDAQ "summation" index, NASI. In effect, the McClellan's helped popularize cumulative A/D as a technical indicator.

The 15-year chart below shows NYSE breadth (red) in cumulative mode, with SPX price (gray) superimposed. As you can see, the two maintain a very "rational" relationship. A/D began declining in mid-1998 as the SPX went parabolic, a sign that something was amiss. A/D then began climbing as the market corrected, until in 2002 when they not only synchronized, but and breadth accelerated! Breadth has now outpaced both the SPX and Dow higher for over 5 years, a very bullish feature accompanying their all-time highs.






In contrast, nothing could look more different than a similar chart of NASDAQ breadth (FYI -- NASI mirrors this chart very closely). The baffling truth is that except for an 11-month uptick in 2003, NASDAQ breadth has trended negative for 15 years!. Using cumulative breadth as a NASDAQ timing indicator would have kept you out of the stock market essentially in perpetuity.

The problem is that the NASDAQ has gained 375% since 1992 (not even counting the epic 1998-2000 run-up). In fact, using cumulative NASDAQ breadth as a sole timing tool would have produced miserable results for most of the NASDAQ's 36-year history. This is the gist of the criticism leveled at NASI for so many years. How important can a tool be if it produces sub-par results for its entire lifetime? What's going on here?







As luck would have it, about three weeks ago I stumbled across How Cumulative Breadth Can Mislead You by Babak at his excellent blog, Trader's Narrative. In his post, Babak responded to Michael Panzner's assessment that, based on cumulative A/D, the NASDAQ was running out of steam. This is a very common observation, and in April, Bill Luby steered me to Stephen Vita's equally skeptical Breadth/Schmeadth.... TOF even pointed out recently that NASI -- long-regarded by him as the "poor man's timing chart" -- has been "unreliable for the past year or so".

In his response to Panzner, Babak pointed out that a moving average of non-cumulative NASDAQ breadth produces results far more predictive of actual NASDAQ performance.

I wrote to Babak about the reasons for this, and he described an exchange he had with master technician Helene Meisler from The Street.com about the weirdness of NASDAQ cumulative breadth. Meisler agreed, and her working hypothesis is that, over the years, the NASDAQ has grown itself through a steady flow of putrid, weak IPO's, a problem that the NYSE hasn't had. As a stock exchange, the NASDAQ has cumulatively become the worst of the worst, while the NYSE -- with its stricter standards -- is the creme de la creme.

So, breadth really does matter, but with the NASDAQ it helps to account for some of the garbage. The way to do this is to track NASDAQ breadth not just with NASI alone, but with non-cumulative A/D data as well. Stockcharts provides such a chart ($NAAD), which I smooth with moving averages.

Below are 3-year comparison charts of weekly NASDAQ A/D data vs. NASI. The difference between the two is obvious, and the results offer revealing insights into the current NASDAQ strength. I track daily versions side-by-side here.

best

dk

Another Record High

Impressive economic data put a solid ending on a surprisingly strong week for stocks.

The NASDAQ printed another new, 6-year high on Friday, but unfortunately volume slipped 19%. New-high dojis on lower volume often suggest trend exhaustion. This may prove true, but dojis are also common as continuation patterns. The recent trend contains important twists which support this as a real possibility.

For starters, the IBD100 is on fire. Leading stocks outran the broader market for the 5th straight day on Friday. While the market saw fractional gains, the IBD100 shot up 1.2% as 72 of 100 stocks posted gains. Also, a stunning 34 of 100 stocks printed record highs, following 31 new highs on Thursday and 24 on Wednesday. Leading stocks are under serious accumulation, and this is definitely not the sign of a market near an important top.

Second, market internals extended their bullish streak to a 5th consecutive day as well. As a result, charts of the market internals look the best they have in over six weeks (see for yourself) . Volume or not, the market has demonstrated steady, internal improvement which is also inconsistent with topping patterns.

Third, all low-volume trade isn't created equal. Even though volume has been below-average this week, it hasn't been a random event. It's been part-holiday, part-seasonal, part-apprehension ahead of key economic reports. This makes the lack of selling pressure actually much more conspicuous, and probably more important as well. Trade may be low, but that's very different from saying that investors are ready to sell.

On one hand, the pair of gaps on the chart below raises the odds for a pullback. On the other hand, few things are more bullish than a pair of gaps. For now, the Composite looks like any dips will eventually be bought.







Last weekend, I mentioned that the Composite weekly was perhaps the most promising chart of all. It shows the recent consolidation to the 10-week and strength of the breakout very clearly. It was a bullish chart then, and continues to be even more so now. There's a lot to like about the chart below.







The bond market continues to sell off as US economic strength becomes more clear. As a result, investors have driven yields to levels not seen since Aug 2006.







According to the mainstream press, a key reason for Friday's tepid stock action was the surge in bond yields. However, the chart below compares the 10-year Treasury yield with the SPX over the past 9 years. It shows three important things: 1) yields historically move in parallel with the stock market, 2) yields are actually no higher than in 1998 when the PE of the SPX was 30 (and climbing) vs. 17 today, and 3) bonds diverged from stocks in mid-2006 on recession fears, and now yields are playing catch-up.

Given the reason that yields are now climbing (i.e. no recession) , rates historically can move quite a bit higher before they have a significant effect on stock prices. Currently, long yields are still 6% lower than Fed funds, which equates to about 2770 on the NASDAQ.







One of the most provocative features of the rally from July 2006-to-present is that it has been completely and utterly joyless. Even though the NASDAQ is up 29% (600 points!) since July, few investors have gotten any pleasure out of it. In fact, investor sentiment has remained startlingly low, even to the point of pessimism.

For example, over the past two weeks, the AAII Bull Ratio has fallen, even as the SPX printed a new all-time high and every major index printed record closes. Cynics say that investors are "so bullish", but the evidence contradicts this claim. Most investors are cautious at best, and certainly no one's having any fun.

Of course, this is textbook contrarian bullish. The reason for this is that statistically, people who say that they're bearish have reduced their long exposure. They're not "all in", which -- at record stock market highs -- is a very encouraging data point.

Note that the AAII Bull Ratio has fallen back to levels at the Feb 27 selloff, even though the SPX is a whopping 12% higher. Investors are grumpy and skeptical. They refuse to give this market any credit, and -- given the recent economic data -- few things could be more bullish for stocks.







Who knows what Friday's doji will mean for the stock market by next weekend? What's clear is that the IT trend remains higher, and there are few signs that we're near an important top.

Three times in May, a slew of technical indicators said that the market was about to correct. I grew cautious and said so in these posts. However, the stocks in my portfolios eerily saw almost no distribution and gave few sell signals. In fact, even at the shakiest market moments -- as I was writing "adjust risk to taste" -- I personally was still 85% long. The stocks I owned were simply telling me not to sell.

Trusting the market continues to pay off handsomely, and I hope the market is treating you well too.

Until Monday, enjoy the rest of your weekend.

best

dk