Saturday, May 10, 2008


After climbing for 6 of the past 7 weeks, the NASDAQ took a breather this week, printing an inside candle on flat trade.

Given record oil prices and broad economic weakness, this is surprisingly sanguine behavior. On a day that investors were forced to wash down AIG detritus with $126 crude, the market logged its 4th lowest trading volume in 2008. Institutional investors continue to be reluctant to unwind their positions, even in the face of withering economic circumstances.

Friday's quiet action was even more remarkable when you consider that earlier in the week, a big distribution day rattled investors. Wednesday's tumble created angst over whether the 7-week countertrend rally is over, or is just taking a break. While it's too early to know for sure, the lack of downside follow-through under stormy conditions is an encouraging sign for the bulls. Adding to the mix, the MID actually closed higher on the week.

The odds favor the NASDAQ eventually testing support -- perhaps down to the blue 10-week EMA on the chart below -- before revealing a clearer near-term path. More than a few days of trading below 2350 would be the kiss of death for this rally.

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In a healthy market, growth outperforms value. The ratio chart below measures Wilshire 5000 growth stocks vs. value stocks, and a climbing line is good for the market. This line has actually tumbled off the 2000 top for the past seven years, before finally bottoming in May 2007. This week, as the broader market wobbled, the Growth/Value ratio broke to a new 3-year high. This is a significant development on a flat week, and a sign that new forces are rumbling from within this market.

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Energy has become an increasingly crowded trade, and the USO is showing signs of technical wear. As crude vaulted 15% in the past seven sessions, Money Flow revealed the footprints of heavy selling. Trading at a capillary-bursting 59% above its 200-day EMA, even oil can become temporarily mispriced. Got DUG?

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One of the most reliable indicators of market strength is the performance of stocks with the very best fundamentals. A handy proxy for this group is the IBD100, and that index added 2.2% this week. Unless a steady stream of distribution days arrives soon, stocks are likely to shake off this correction and continue moving higher.

Until then, have a great weekend.



For additional charts and commentary, see The dk Report Charts


Born2Code said...

excellent post.
Oil does look like a climax top here though it has been wrong to bet against it for so long.

Tom K said...

"In a healthy market, growth outperforms value."

If I'm not mistaken, value stocks outperform in bull markets. Small cap growth tends to outperform at the very beginning of bull markets. I remember reading about this stuff in the Research Driven Investor by Tim Hayes of Ned Davis Research.