The dk Report

Amazon.com One-Star Customer Reviews: The Beatles Remastered

2009-09-18T10:19:00.001-07:00

Below are excerpts from dozens of actual Amazon Customer Reviews of the recently remastered Beatles CD's.

In each, dissatisfied customers ascribe a lowly One Star to music widely regarded as deserving Five-Star status. They also back up their rating with very specific reasons for their dissatisfaction.

In almost all cases, the syntax and spelling of the original review has been carefully preserved throughout.

Amazon.com One-Star Reviews - Part 1: Books
Amazon.com One-Star Reviews - Part 2: Music
Amazon.com One-Star Reviews - Part 3: Movies

The Beatles Remastered

Sounds like polished turds.

Sadly exposes just how far the Beatles were behind the times.

This is not music.

Minus fifty stars.

Ever heard of a word called "Porduction", lads?

Each and every song put me to sleep in about 55 seconds.

There's a reason you never hear of these guys any more. They're probably all living in a shack trying to live on their little checks for "Norwegian" Wood.

The masterful Michele is impossible to listen to, it is missing that incredible Parisian atmosphere that is in the original.

You only have to listen to almost any track made in stereo across the past forty years to know it just sounds nicer when the singer's voice is coming from the center.

In Mono the Beatles guitar is magic, now it sounds like an afterthought.

I doubt if it will receive much play in my home system, because it is just too obnoxious for higher-end gear.

I'm not buying another copy of the White Album, no matter how good it sounds.

On Abbey Road, I don't know when one song ends and the other stops. They have different lead singers for every song!

I Want You(Shes So Heavy) is Lennon singing the title over and over again for about an hour.

I saw Paul Mcartney live last year and he was better than Abbey Road, and the other Beatles weren't even there.

The Technicians that created the CD version of Abbey Road should have been fired & sent back to working as shelf stackers at the local supermarket.

All I want is the Beatles, not the middlemen.

Marketing hype probably not seen since Geraldo's upcoming look into Al Capone's vault.

Remember that wonderful Paul vocal flourish at the end of the Sgt. Pepper reprise? It's back in all it's glory--but you have to shell out $230 to $300 for it.

I just plunked down $200 for some nifty packaging.

What is this? The Thatcher/Reagan/Bush approach to music?

Can't afford it. I will continue to get my Beatles out of the public library and dub them on cassette.

The Beatles rip offs never end. What about another boxset in 3 years time, maybe a fabulous release of the butcher album cover?

When will we be expected to buy the "re-mixed" re-released collection of the Beatles catalog? In 2017 when more than half of the original Beatles fan base have already died?

Sgt. Pepper's is an inferior piece of music representing an inferior generation.

I don't think normal folks are really gonna care.

Beneath the attention of an adult intellect.

I am glad the Stones are not sell outs like the Beatles.

The Beatles are NOT the best band ever. Cry baby cry.

Rich guys puttering! Who needs it?

Who would buy this when you have Pink? Get her new album instead.

Amazon.com One-Star Reviews - Part 1: Books
Amazon.com One-Star Reviews - Part 2: Music
Amazon.com One-Star Reviews - Part 3: Movies

Amazon.com One-Star Reviews - Part 3: Movies

2009-08-26T10:10:00.001-07:00

This is the third installment in a three-part series on One-Star Customer Reviews at Amazon.com (hat tip Johnny Dee).

Below are excerpts from dozens of Amazon.com Customer Reviews of noteworthy films. In each critique, the author ascribes a lowly One Star to a movie that normally maintains Five-Star status in the artistic canon. It's worth noting that most of these critical non-professionals would have eagerly awarded zero stars if given the opportunity.

Without question, each of these critics has their reasons, and objectivity is trumped by taste at every turn.

In almost all cases, the syntax and spelling of the original review has been carefully preserved throughout.

Amazon.com One-Star Reviews - Part 1: Books
Amazon.com One-Star Reviews - Part 2: Music
Amazon.com One-Star Reviews: The Beatles Remastered

Movies

Casablanca
Now I know it's old but it's not based on the Civil War. It's during World War II. A lot of people, including blacks, got killed so the studios could make this awfulness.

This movie steals tons of catch phrases: "Play it again", "This looks like the beginning of a beautiful friendship," etc. It even has a whole speech of nothing but catch phrases. Hire a screenwriter next time.

Ingrid Bergman is no Maryland Monroe.

I'm pretty sure I will enjoy it a lot more when Warner Bros finally gets around to releasing the colorized version.

Gone With The Wind
We don't need reviews on how good or bad the movie was. It's been around since 1939. People have made up their minds about it.

The movie is basically about two alcoholic, money filled, greedy, rascist brats falling in love during a war which they totally portrayed wrong.

I'm more sorry that it doesn't come with a warning label reading "Racist fantasy enclosed".

Olivia de Havilland's exceptionally bland performance of a 'saint' makes her character appear mentally retarded.

If this is what The Old South was really like, then thank God those damn Yankees won.

At no point in this movie does anyone's head explode in flames. This movie clearly fails to understand the emotional resonance a burning head can create.

This film is comparable to any "Ernest" movie, that is, without the laughs.

Lawrence of Arabia
Easily the most boring movie of all time.

"I shall be in Aqaba. That IS written". There you've just had all that's worth watching in this most protracted piece of utterly useless celluloid.

HOW ON EARTH THIS WON BEST PICTURE IS BEYOND ME. WHAT WAS RUNNER-UP "WATCHING PAINT DRY"?

To my horror, I saw that film came complete with those horrific black bars at the top and bottom of my screen, which obscured about half of the picture. I've seen those bars on the "artsy" videos, but this is a classic work of art! You don't try to make it "hip" and "relevant" with modern touches. It's like adding a moustache to the Mona Lisa.

The Godfather
When's an editor when you need one? This movie is so long that I played it on my TV, drove across the state, and when I came back, it was still playing.

This movie is as boring as a trip to the doctor's. No good violence, no hot sex scenes, and furthermore, it stereotypes Italians.

Finally saw this movie with my family and after an half hour I was thinking of running out in the middle of rush hour traffic. That would have been more exciting than watching this all the way through.

I did indeed sit through all 57 hours of the Godfather and not only is it one of the most boring movies ever made it's completely pointless garbage.

"The Godfather" has an ugly consciousness and a mean spirit. I see no justification for it, thoroughly disliked it, and have tried to forget it.

Annie Hall
I've always resisted watching this movie because it was awarded the Oscar for Best Picture over "Star Wars."

Let me acknowledge Woody's intelligence, but I always felt like slapping the guy.

Diane Keaton won an undeserved oscar for this role. Why? I dont know. It isn't that great.

We eventually decided that BOTH characters tie Jar-Jar Binks for "Most Annoying Screen Persona in History"!

Annie Hall is Allen's attempt to be Groucho Marx.

Star Wars
Star Wars is the biggest fluke in movie history. This movie was never meant to succede, and I don't understand how it got so big.

Star Wars, to quote the neo-marxists, is one truly OFFENSIVE movie against someone's intellect.

Darth Rader (or something) is a born again Adolph Hitler with much wider goals: conquer the UNIVERSE (rather than our forgettable planet) at all costs.

He ripped off Dune.

Let the farce be with you.

E.T. The Extraterrestrial
The movie is very representative of the eighties, that is to say with an American family of the middle class, with a good dog and a great barbecue.

I don't believe in any kind of extra terrestrials. The few that I do believe in don't look like E.T. at all.

There must have some kind of trick photography when they made this because I can't really believe in this at all.

If you found an alien in your backyard, would you secretly keep him and not tell your parents?

This film is clearly made for mass market moronic consumption. Thank-you Mr Spielberg-McDonalds-Global-Industrial-Complex!

The alien looks like my old carpet.

The music is often tearful with a lot of tremolos.

Pulp Fiction
I know there are a lot of technical terms associated with a movie production like screenplay, direction, plot, acting, etc. Unfortunately I don't know the definitions of most of them.

I didn't like how it tried to be too original. I want a movie I can read from cover to cover.

Pulp Garbage would have been a better title.

It's a movie for STRAIGHT WHITE MALE GEEKS.

The tremendously under-talented Bruce Willis made this film difficult for me to watch.

John Travolta is awful. I nicknamed him John Revolta after seeing this.

As for the use of the "N" word, I wonder what Tarantino would do if Spike Lee made a movie where Italians were called nasty names?

This was like Elmore Leonard on an off day.

In closing, Uma Thurman just can't dance...

Fargo
This movie is quite possibly the worst movie that's ever been made outside of Ed Wood.

My review of this film comes from the heart of my middle finger.

It is not funny, and does not make an effort to be funny beyond presenting a handful of talented actors filling two hours with empty ridicule of the prairie accent.

I'm from North Dakota and we don't talk like that. I have NEVER heard anyone under age 70 say "Darn tootin'."

OK, so you're making a movie ... and you stick your wife in the leading role ... But, there's a problem: She's a dreadful actress ... Solution? Convince the starved American audience the entire thing is "quirky".

I ordered a book off of a Christian category and this movie popped up as being recommended. My husband and I watched it one night while our children were gone. Thank goodness.

What a shame that a Midwesterner (Thomas Edison) invented motion pictures, when this is how Hollywood's spoiled children use his invention to portray his people.

I would rather watch a Jerry Lewis telethon straight through than ever watch this movie again.

LOTR: The Return of the King
This Movie Is horable!!!!!!!

How the hell does a 4 hour movie win best editing?

These clowns have dismantled the Colosseum to build a Wal-Mart.

The filmakers substitue endless, incoherent battle scenes in place of story-telling.

The fab three cant be killed after 5 endings and 10 battles where they are outnumbered 1000-1?

The entire mess is shoulder-deep in god-awful special effects. They are about the furthest thing imaginable from the masterly use of visuals in the Empire Strikes Back.

Could the last part of the movie be longer? The ring is destroyed, the movie fades out, and I'm like oh thank god, it's over. But no, it goes on for another hour.

Bloated Bloated Bloated Bloated Bloated Bloated Bloated Bloated Bloated Bloated Bloated Bloated Bloated Bloated Bloated OVERACTED

I give it one star because I have to and because by some accident they got Gollum right.

By the way LOTR freaks, there is no Middle Earth!

Lost in Translation
If you have seen the movie and were not impressed by it, do not feel bad. There's nothing wrong with you.

I am convinced the movie was filmed in one day and the rest of the money that was supposed to go toward making it was stolen.

I think the popularity among critics is that it shows an 18 year old who actually has an attraction to a geezer.

I fogot to say that the first thing you see in this movie is the buttocks of Johanson in her panties. What for? When a movie starts like that, can you expect anything good?

Lost in Translation is a new code word amongst friends meaning GET ME OUT OF HERE!

This movie did more to undermine the credibility of the Academy than "The Crying Game".

I would rather have my teeth cleaned then watch this again.

This is worse than an imitation crab-stick.

I've tried to figure out how Bill Murray could have gotten himself involved in a project like this. My conclusion: he lost a bet!

Amazon.com One-Star Reviews - Part 1: Books
Amazon.com One-Star Reviews - Part 2: Music
Amazon.com One-Star Reviews: The Beatles Remastered

Amazon.com One-Star Reviews - Part 2: Music

2009-08-26T10:05:00.000-07:00

This is the second installment in a three-part series on One-Star Customer Reviews at Amazon.com (hat tip Johnny Dee).

Below are excerpts from dozens of Amazon.com Customer Reviews of noteworthy rock albums. In each critique, the author ascribes a lowly One Star to an album that normally maintains Five-Star status in the artistic canon. It's worth noting that most of these critical non-professionals would have eagerly awarded zero stars if given the opportunity.

Without question, each of these critics has their reasons, and objectivity is trumped by taste at every turn.

In almost all cases, the syntax and spelling of the original review has been carefully preserved throughout.

Amazon.com One-Star Reviews - Part 1: Books
Amazon.com One-Star Reviews - Part 3: Movies
Amazon.com One-Star Reviews: The Beatles Remastered

Music

Rubber Soul
These songs are all available without buying this CD. You can hear these at your dentist's office or in most elevators over the muzak system.

"Drive My Car" is a totally dumb song, Beep, Beep a-beep beep yeah! Sorry. Doesn't work for me.

Think For Yourself: A Goerge Harrison Song. That means it's Rubbish and Horrid.

I prefer Jim Nabors...his voice and styling is superior to the Beatles...and a much better actor.

Revolver
Revolver is the Beatles' weakest album, worse than Yellow Submarine.

I Want To Tell You - truly horrific peice of mid-sixties nonsense.

Tommorow Never Knows - Space Music. This song might sound good in a telescope.

I hate Revolver with the same passion that I hate Nsync, the Backstreet Boys, and Britney Spears.

The best thing I can think about The Beatles is that they came from Liverpool. But given that none of them even cared about football, never mind Everton, I won't even say that's a good thing.

A candidate for the worst album of all time by any artist.

This really is elevator music. My ears basically started bleeding.

Revolver does the Beatles' reputation irreparable damage, and it was also their least influential work.

Blonde on Blonde
Dylan's so twisted it's very difficult to tell what he's really saying/meaning.

What kind of music do you make with hair like that?

Vocals that make Keith Richard sound like a opera singer.

This was a 5 star harmonica record. Subtract 1 star for Bob Dylan's drunken-old-man singing (he sounds homeless). Subtract one for this being made so long ago. And subtract one more for the title, which doesn't make any sense.

Anyone want to buy a barely used copy of Blonde on Blonde?

Are You Experienced?
Words cannot describe my intense dislike for Jimi's guitar "skills". This guy is a HACK.

I was surprised that MTV didnt play any videos from this album, I wonder why? Probebly cause the MTV crowd know this music is tired and boring.

How could anyone in their right mind say that this Hendrix guy is good?

His solos are just a bunch of noise and his sound is dated, unlike good bands like Great White and Skid Row.

There's no good music here. He's boring, talentless and he whines.

I would have to go against the grain and proclaim him as the perhaps the worst guitarist that ever lived.

The Doors
The 60's were a whacked-out era, and this piece of solid gold crap is a time-machine to the scene of the crime.

One of the most hilariously overblown, psuedo, pieces of nonsense to come out of a 60's recording studio, and oh boy did it have some competition.

There is no rock here. They're boring. They whine.

The highlight is the howlingly funny The End, it needs a Mike Myers to really do it justice.

"The End" is a mindless rant that wouldn't make the cut on "The Wiggles".

A collectors item for those who have a taste for kitsch.

Velvet Underground and Nico
What's not to love? Well, everything.

Pretentious lyrics, painful melodies, mediocre musicianship, and an album cover that Andy Warhol spent five minutes designing.

This is one of the worst albums I have ever heard in my life. More to the point, it was and is unmusical.

The album starts off with a little toy xylophone. A TOY XYLOPHONE! Come on! How the hell can your name sound like "Velvet Revolver" and you put little tinkly xylophones in there?

The guitars and Nico's and Lou Reed's singing are very, very much out of tune, and no one here knows how to play his instrument.

OK, so they hung out with Andy Warhol who survived getting shot, but he got shot by some lady, it's not the same as when a Gangsta shoots you.

John Cale's violin screeches offer the final proof that this is one album you cannot listen to for pleasure.

If you like this album, you deserve it.

Led Zeppelin IV
I tried eating a grass stalk when I was a kid. It was horrible. I tried getting into this album as well. It was horrible too.

Stairway to Heaven was never that great but it was at least listenable the first oh 700 times.

Anyone who can sit through a whole Led Zeppelin song should pack up and move into the woods and live alone with their dog, using wood for heat and moss and bark for food.

Thank you Led Zep! You, this album, and the bloated "Stairway to Heaven" created the pompous arrogance that gave punk something to rebel against.

Dark Side of the Moon
If you were born after 1965, don't even think of wasting money on this. It's music for old people.

Easily the worst CD in the whole wide world! I'll take Prince's Around the World in a Day or Barry Manilow's Greatest Hits Volume 2 any day!

My first listen was like being splashed with cold lamb fat. My second was like being doused with cold lamb fat. My third was like being drowned in cold lamb fat.

The electric pianos sound like the ones anybody's grandma plays for hootenanny festivities. Sha-la-la, take your partners, that kind of thing.

The Great Gig in the Sky tries to compete with great bands like Tavares and Village People but fails miserably.

This cacophony of commie buzz words and simplistic, condescending communist ideals both offends me as an American, and as a music listener. Should've been called Red Side Of the Moon.

They have their spot reserved in hell for making this music.

I have my dady who is a lowyer sue this peoble whoo havesays this Cd is good. I never have herd sutch bobbycock. -- J.L., Wichita Falls age 6

I don't understand what the big deal is. Kevin Federline owns these guys.

Exile On Main Street
I really wish the Rolling Stones would have polished this album up before releasing it.

This sounds like the type of crap that any garage band can throw together in a few weeks.

I'm putting this one at the bottom of my CD collection and poppin in the latest Mariah Carey album. That's good music.

Listen to some REAL music that actually requires talent - like Nickelback!

Rumours
Fleetwood Mac were so good in the late '60s, why did Stevie Nicks and Lindsey Buckingham have to ruin it??

Stevie Nicks' vocals are so high, he sounds like a girl.

Lindsay Buckingham should find a way to sing with his mouth tightly shut.

Mick Fleetwod looks like he should be panhandling on a street corner somewhere.

Oh, and another thing wrong with this album is that there is no 'U' in 'Rumors.'

Thriller
The music video of this traumatized me as a child, as well as the movie Annie.

Michael Jackson sound like he mad in most songs. And sometime he sound out of breath. He grunt on songs too.

Songs not making sense. "Baby Be Mine" not about a baby, it about something else.

I couldn't help but laugh at the song "Human Nature". It almost sounded like a song from the 2000s, trying to make fun of the 80s.

Asinine and vapid are the nicest words I can use.

Born in the USA
As soon as I saw the cover of this record, I knew it was going to be bad.

I recently heard the song "I'm Goin' Down" on the radio and I counted the number of times Bruce Springsteen sings the word "down". Quite honestly, I lost count at 70.

"Born in the U.S.A". has to be one of worst songs ever written. It ranks up there with "Feelings".

Without the powerhouse band and ocean of reverberation, perhaps you can now hear what this song should really be called, "Bored in the USA!"

As for the subject matter bein' about somebody dying in a war?... well it don't sound like no sad song to me.

Bruce Springsteen is living proof of P.T. Barnum's quote, "Nobody ever went broke underestemating the intelligence of the American public".

Amazon.com One-Star Reviews - Part 1: Books
Amazon.com One-Star Reviews - Part 3: Movies
Amazon.com One-Star Reviews: The Beatles Remastered

Amazon.com One-Star Reviews - Part 1: Books

2009-08-26T08:56:00.000-07:00

This is the first installment in a three-part series on One-Star Customer Reviews at Amazon.com.

On Aug 15, 2009, culture writer Johnny Dee at The Guardian wrote a funny and provocative piece on withering Customer Reviews at Amazon.com of critically-acclaimed artworks.

~~Stealing~~ Taking Mr. Dee's idea a step further, this series extends these blue-collar critiques. Below are excerpts from Amazon Customer Reviews of Books, Music and Movies. In each, the author ascribes a lowly One Star to works that normally maintain Five-Star status in the artistic canon. It's worth noting that most of these critical non-professionals would have awarded zero stars if given the opportunity.

Taste trumps Objectivity soundly at every turn, a practice that would have made even Kant blush. Welcome to the democratization of aesthetic criticism.

Note that, in almost all cases, the syntax and spelling of the original review has been carefully preserved throughout.

Amazon.com One-Star Reviews - Part 2: Music
Amazon.com One-Star Reviews - Part 3: Movies
Amazon.com One-Star Reviews: The Beatles Remastered

Books

Beowolf
Fortunately, this is a very short book because if it had even been one page longer I would have had to resort to a slow, painful suicide (which would have been more interesting than "Beowulf").

Everyone's grandmother would be ashamed to know the language they use.

The only part of the story I enjoyed was at the very end when Beowulf gets killed by a fire breathing dragon.

We freed ourselves from the British government through war and struggle. What do we have to do to free ourselves from their literature?

The Odyssey
The Odyssey is a pathetic, lost little child of a poem, obviously written by some eager but mediocre student of Homer's after the poet's death.

Homer remains a mystery to me. What person alive says, "that nonsense coming past your teeth"?

I dont care if Homer was blind or not this book is like 900 pages too long.

Many times I could turn three more pages and still be in the same spot.

I thought this story was very gross and I almost threw up.

Apparantly, it IS possible to go wrong with The Odyssey. Fitzgerald is 100x better.

Othello
I don't get where people get the notion from that Othello is realistic. Maybe if you lived inside a box your whole life.

I actually laughed numerous times when the play was supposed to be serious - the book is filled with bathos.

Othello is not unlike Calvin's character in "The Titanic". And the truth is I have more sympathy for Calvin.

The most annoying thing about this play is that except for Iago, all of the characters are major simpletons.

Pride and Prejudice
Pride and Prejudice is simply a 19th century British version of the Jerry Springer show.

It is a book where they compliment women as being handsome and men as being well...also handsome.

I tried and tried to read it, but it was all nonsensical jibber-jabber.

The book is quite contagious because I find myself helplessly imatitating the language that it was written in.

If you like torture, read book. If you smart, spend money on Beacon Soda.

After finishing the book I ran to a bookstore and traded it for a second-hand copy of 'A House for Mr. Biswas'.

Anna Karenina
This 80000000000000000000 page "book" isn't just boring and depressing, he was trying to convince us that life is boring and dull.

Primarily consists of a guide on how to cut grass, how to hunt bear, and how to abandon your own kid for a gigolo. If I wanted all that stuff I would have read Farmers Almanac.

Make sure you don't let the novel slip from your hands as it would probably break your foot.

I'm glad Tolstoy isn't my next door neighbor.

A pulseless corpse of a book.

Great Expectations
After reading this book, I think Dickens would benifit from very low expectations: a lot of people will be returning this book and giving bad reviews.

I do understand that each chapter was published separately over many months, and therefore Dickens had to make them a good length, but COME ON!

You will like this book if you enjoy a story that never ends and gets old at about page 10.

This book reminds me of algebra, its boring, time-consuming, worthless, and you will never have to use this in your whole life.

I give this book a minus 200 on a scale from 1-5.

For a more thrilling read, try a dictionary or a phone book.

Frankenstein
Mary Shelley wrote this book when she was 18 and it really shows.

Mary Shelley is in need of a good editor almost as much as friggin' Frank Norris with his stupid novel McTeague.

It would be a great read on the crapper, but since it is longer than 50 pages, just read the cliffs notes. Otherwise youre wasting your time.

Its amazing that in less than a year, a monster, made from dead criminals can learn to speak better than i have been able to in my entire life.

I know that Mary Shelley had many miscarriages and children's deaths and this book is about that and blah blah blah

This book is totally sketch.

READ DRACULA ITS WAY BETTER!

Moby Dick
Moby Dick is, after all, essentially the plot to "Jaws".

It leaves you with that, "I hate myself" feeling you get after accidentally destroying a major city with a hydrogen bomb.

"Call me Ishmael"? Call ME bored.

We must face it 100 years or so ago American literature was reall weak and lagging from the rest of the world. Perhaps now they're starting to catch up with writers like Ann Rice.

Had Melville cut this book down to about 25 pages, it would be bearable. Unfortunatly, he never stopped writing. If he were alive today, he would probably still be adding onto Moby Dick.

Compared to "Moby Dick", "War and Peace" is a light, fun read where your eyes just fly across the page.

Doubt he could get it published today.

Ulysses
Few unread novels have enjoyed as much success.

Ulysses has two great strengths. First, it steals the plot of the Odyssey in its entirety. Second, it is equally incomprehensible to both English and non-English speakers alike.

There is a famous sex scene in this book where the mental thoughts of the individual coming to climax fills many pages. No one I know thinks about anything while climaxing. Totally unrealistic.

I believe he has turned many children away from reading. I think this helps to account for, say, J.K. Rowling's success.

Its only function is to keep blinkered academics busy.

In the words of a *real* writer (H. L. Mencken): it is rumble and dumble, it is flap and doodle, it is balder and dash.

It was later said when Joyce was dead and buried that he had confessed to a close friend that "Uylsses" was a completely fabricated joke that he used to get revenge at the world with.

The Great Gatsby
Gatsby is the 2nd greatest novel of the 20th century? Are you serious? Above Lolita?

It is like a great suspension bridge for which the pillars have been laid but no attention given to putting down the road itself.

"Gatsby" is the work of a bad juggler--it would have been so much better if he'd tried fewer balls.

I would recommend this book only to the person who likes to read about stupid people sleeping with each other just to seem important.

If I wanted to read about lame, rich, full of themself people going to parties, I'd pick up People magazine.
I would rather be reading something written by Issac Asimov.

Oops, sorry about that! I seem to have fallen asleep again.

The Sun Also Rises
Ernest Hemingway has made alcoholism into a fine art, because that is basically what all his novels are about.

Here's the first half of the book: "We had dinner and a few drinks. We went to a cafe and talked and had some drinks. We ate dinner and had a few drinks. Dinner. Drinks. More dinner. More drinks. We took a cab and had some drinks, and maybe we danced and flirted and talked sh*t about somebody. More dinner. More drinks. Maybe you should come up to my room, no you can't".

Every page I turn has "drink", "wine", "bottle", "bar", "cafe", "coffee", "breakfast", "lunch", "dinner" or any word related to dipsomania, gastromania (or bulimia perhaps?) written all over it.

If Hemmingway took out every reference to drinking the book would be about 10 pages long.

I kept hoping that the story would end with the ugly Americans and arrogant Brits entering a detox center and becoming the initial success stories of AA.

The sooner Papa Hemingway is forgotten the better American literature will be for it.

The Sound and the Fury
Incontestable Fact: Any book that can't be understood without the aid of the author explaining it is a failure.

I suppose if you want to really study Faulkner so that you can get in on all of his inside jokes and hidden symbolism, then this book is for you. The rest of us have jobs.

Faulkner writes using "Stream of Consciousness". One problem: the first part of the book is about someone who is mentally retarded.

If you buy the book, you will get the joy of reading page after page of text with NO PUNCTUATION WHATSOEVER. No capitalization, no commas, no periods. NOTHING.

I hate it when characters are given the same name, especially when one is male and the other is female.

Do not get on a plane to L.A. with only this book to read.

Of Mice and Men
It would have been a better book if Steinbeck had put more effort into it.

When you read his books you get the feeling that he started out with this great idea, and then got bored and finished the book real quick.

They should re-name this book Retard on a Ranch.

The reason I gave the book one star is because that is as low as I could give it. This book was awful.

The only reason I read it in the first place was because my teacher said read it or fail. Looking back I wish I would have just taken the zero.

Amazon.com One-Star Reviews - Part 2: Music
Amazon.com One-Star Reviews - Part 3: Movies
Amazon.com One-Star Reviews: The Beatles Remastered

Sell in May? A Follow-up

2009-05-30T10:24:00.000-07:00

At the beginning of May, I wrote a post questioning the validity of the old trader's axiom of Sell in May. Although it's a widely-held truism, the previous 29 years of market action in May reveal the exact opposite to be true.

With May 2009 in the books, the contradiction has extended itself.

The NASDAQ has now closed higher in May a remarkable 20 out of the past 30 years -- a 66% occurrence rate since 1980. The SPX has done even better, with a positive close in 21 of the past 30 May cycles (70%).

The streak has strengthened in recent years. Since the 2002 bottom, the NASDAQ has climbed in May six of the past seven years. The gains are statistically significant as well. Since 1980, the average May for the NASDAQ is +1.87%; for the SPX it's +1.51%.

However, despite this track record, predictions of May weakness are trotted out each year as part of the established canon of trader wisdom.

Why the discrepancy?

Perhaps the biggest reason is that Sell in May is the opening gambit in a longer seasonal trading strategy known as the Halloween Indicator. Part of trader lore for generations, in July 2001, Sven Bouman and Ben Jacobsen examined the financial markets of 37 countries, some as far back as 1694. They established that, across three centuries and multiple economies, winter has produced better market results than summer. So, for 300 years, selling in May and buying back in after Halloween has produced better returns.

The point here is that for 30 years dumping stocks in May has reduced these seasonal returns, and it's a fact inexplicably unnoticed by trading mavens, the mainstream press and the blogosphere alike. For example, in Oct 2007 Mark Hulbert -- normally excellent with these types of observations -- considered ways of improving the Halloween Indicator. However, Hulbert focused on MACD confirmations and never mentioned May performance. This year, Hulbert insisted that the Halloween Indicator remains strong, while again neglecting the May anomaly. It will be interesting to see when the investing community finally recognizes that Sell in June is the better rule of thumb.

It's important to understand that, by their own admission, Bouman and Jacobsen could never establish why financial markets outperform in winter. Looking ahead, it's possible that globalization and the 24/7 interconnection of world economies could impact this centuries-old market pattern to an even greater degree.

As I write, the profitable winter season is just three weeks away -- in Brazil, Australia, Indonesia, South Africa and every other market south of the equator.

Time to sell?

Sell in May?

2009-05-02T12:06:00.000-07:00

Is May really a good time to sell?

I looked at the past twenty-nine May trading periods on the NASDAQ -- from May 1980 to May 2008. Surprisingly, the NASDAQ closed higher during the month of May a very respectable 19 out 29 times -- a 66% occurrence rate.

Even more interesting, since the Dotcom bottom, the occurrence rate of a positive May close accelerated to 83%. The NASDAQ has posted gains in five of the past six May trading periods.

The result is that in the 29-year sample, the average NASDAQ performance in May was actually a gain of 1.82%.

So much for old wives' tales.

It's worth noting that, up or down, the average moves were statistically significant as well. During the years that the index moved up in May, the average gain was 4.99%. During the years the NASDAQ fell, the average May loss was -4.21%.

The SPX produced similar results. Since 1980, the SPX closed higher in May 20 out of 29 times -- one year better than the NASDAQ! The average SPX performance in May for the past 29 years has been a respectable gain of 1.38%.

The bottom line is that, on average, the market moves higher during most May trading periods. When it does, the moves tend to be a big ones as well. When the market moves lower in May, it's usually a hefty tumble.

Will the stock market close higher in May 2009? It's impossible to know, but a seasonal wives' tale isn't the place to look for answers.

Investing is so complex that there is a natural tendency to try and simplify the process. The problem with simplification is that, by its very nature, it distorts the data. In the case of salty trading yarns, this distortion can produce completely erroneous interpretations.

So maybe it's Sell in June?

The most reliable advice is probably the most useful epithet of them all:

Trade what you see, not what you think.

Good luck trading.

best

dk

NASDAQ Historical Performance in May
May 1980 -- 7.47%
May 1981 -- 3.11%
May 1982 -- (3.34%)
May 1983 -- 5.35
May 1984 -- (5.91%)
May 1985 -- 3.65%
May 1986 -- 4.41%
May 1987 -- (0.30%)
May 1988 -- (2.34%)
May 1989 -- 4.36%
May 1990 -- 9.26%
May 1991 -- 4.41%
May 1992 -- 1.15%
May 1993 -- 5.91%
May 1994 -- 0.18%
May 1995 -- 2.44%
May 1996 -- 4.44%
May 1997 -- 11.07%
May 1998 -- (4.80%)
May 1999 -- (2.84%)
May 2000 -- (11.91%)
May 2001 -- (0.27%)
May 2002 -- (4.30%)
May 2003 -- 8.99%
May 2004 -- 3.46%
May 2005 -- 7.63%
May 2006 -- (6.19%)
May 2007 -- 3.15%
May 2008 -- 4.55%

29-year avg = +1.82%

Long-term Potential

2009-04-08T16:27:00.001-07:00

Because of an epic workload, this is my first post since August 5, 2008.

Watching eight months of historic market action often from a hotel room 16 time zones away has been an unforgettable experience. Water was boiling in pots I could not always see, and in hindsight this produced a more balanced market perspective than I would have gained otherwise.

Thanks to everyone for the e-mails and PMs along the way. All were much appreciated. Even though my schedule is actually more complicated now than it was last summer, recent market developments are worth a few comments.

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

Regardless of what the financial news, economic data, political headlines, monetary policy, pundits, bloggers, message boards, co-workers or even your own common sense is telling you, the market itself is saying that an important, long-term bottom is in.

Of course, the spectacular, short-term shenanigans in the market will continue. The global economy has serious problems, and these are complicated by a lack of consensus surrounding both patient and cure. Investors shouldn't expect a smooth ride anytime soon.

Despite the bumpiness, an increasing number of technical indicators suggest that the March 2009 bottom is an event with lasting value. These data imply that the rally – with all its imperfections – will ultimately have legs. A good way to monitor this idea is during periods of market indecisiveness. If the bias of the market has truly changed, low-volume, enigmatic market pauses will resolve upward, instead of lower as they have for the past 18 months.

However, this post concerns more long-term signals, and below are observations on eight of the more noteworthy. When considered together, these indicators provide perspective on a beleaguered market and its longer-term potential. What these indicators say is that for investors with extended time horizons, the conditions are ripe to start applying capital.

1. The Cyclical Bear Market Continues…
It’s wise to start with a word of caution. Historically, until the blue line on the chart below crosses back above the red line, stock ownership is marked by heartbreak and remorse. That said, the black line below is also printing massive positive divergence. When the stock market finally catches up with this divergence, the momentum is likely to be significant.

2. VIX
One of the great side stories of this recession is how Robert Whaley’s obscure volatility indicator was catapulted into investing superstardom. Fueled by a populist obsession with “fear”, the VIX’s ascent was matched only by the chronic misunderstandings surrounding its meaning. As always, for maximum clarity, read Bill Luby's Vix and More and Adam Warner's Daily Options Report. Both offer hyper-informed takes on market volatility and all its implications.

The weekly chart below shows that the VIX is printing signs of a pending decline. Rather than “causing the market to go up”, a bearish VIX simply indicates that options strategies are shifting as institutional investors warm to the idea of increased long exposure.

3. Bonds
After a 9-week climax run from Oct-Dec 2008, it appears that the historic bull market in long-dated Treasuries may finally be over. Bill Gross has been anticipating this topping event since June 2007, and laid odds it would happen before 2010. It appears he nailed it.

The weekly chart below is bearish for bonds, as institutional investors have begun the long fade out of government debt and into other investments offering better returns. Historically, this redeployment is into equities and corporate debt.

4. NASDAQ High-Low Indicator
While not great at picking tops, the NASDAQ High-Low chart is remarkably effective at picking major bottoms. After big, sub-20 dips, crossovers by the 10-week EMA back above 35 marked key bottoms in both 1998 and 2002. After spending 18 months below, the High-Low is finally ready to cross back above 35. This 18-month submersion marks the longest the High-Low indicator has been under 35 in its 20-year history. It’s one of several market signs that sellers have grown exhausted.

5. Tech Ratio
Another indicator pointing to seller exhaustion is the Tech Ratio. This metric compares an index of 220 pure technology stocks with the overall NASDAQ. The chart below shows that even though the NASDAQ bottomed in 2002, investors continued to loathe tech stocks long afterwards. In the summer of 2006 -- ironically as the Dow was printing new all-time highs -- the scorned Tech Ratio finally hit bottom (red circle).

But fortunes have changed. As the market imploded in late 2008, many tech stocks avoided the intense declines. As a result, over the past seven months tech has actually outperformed the indexes, and in April 2009 the Tech Ratio broke to a new 6-year high. Technology in a sustained leadership role hasn't happened in 10 years, and this is a welcome positive for the market.

6. NDX/SPX Ratio
Another important metric of market-health-through-tech-leadership is the performance of the Nasdaq-100 vs. the S&P500. Historically, the market has always done better when the NDX outpaces the SPX. Like the Tech Ratio, in April 2009 the NDX/SPX Ratio broke to an 8-year high.

7. Emerging Market Ratio
Like the rest of the world, emerging markets suffered withering declines in 2008. However, the slumdogs have since mounted an impressive comeback. The Emerging Market Ratio compares emerging markets with all overseas markets (Europe, Australia and Asia). Like the Tech and NDX/SPX Ratios, in April 2009 Emerging Market Ratio ratio also broke to a new all-time high. Investor appetite for the riskiest global assets is yet another encouraging sign.

8. Contrarian Indicators
Finally, there are the current extremes in negative investor sentiment. The Investors Intelligence Bull/Bear Ratio is near a 5-year low. However, the most interesting feature of this chart is how unfazed it was by the recent 26% rally. The bulls simply don’t believe it, which is exactly what you want investors to feel after a 26% run-up, especially 18 months into a bear market.

Below is a 30-year view of the Michigan Consumer Sentiment Survey. It’s been 29 years since this survey has recorded sentiment so negative. While the reality of this is unfortunate, it is from such despair that the most durable bottoms are born.

These observations provide little insight into short-term market direction. For that, I encourage you to bookmark The dk Report Charts. I keep this chart library current with short-term annotations, even when I'm 16 time zones away.

Soon enough, the current rally will end in an ugly 10-15% correction, probably at the moment of maximum inconvenience. Based on broader plate tectonics, this should be a constructive event, and the odds favor the March lows holding.

Thanks for reading, and best of luck with your trades. I look forward to posting again when I can.

Until then,

best

dk

Green Light

2008-08-05T16:58:00.001-07:00

For the first time since early June, the market is giving an Intermediate Buy signal.

Not only did the NASDAQ poke above its 50-day EMA on decent volume, three of four timing indicators are flashing Buy signals. The 5-10-20, the TOF Ratio and NASI are all on a Buy (see The dk Report charts). Only the BPI Ratio -- typically a lagging indicator -- isn't a Buy yet. It's been a long time since this diverse set of timing indicators have pointed upwards in coordinated fashion.

The chart below shows the NASDAQ is trying to make the best of a bottom retest. It's too early to predict an outcome, but in the past 16 sessions since the low, the Composite has printed just two distribution days.

Even though stocks are gaining their footing, it's important to realize that the buy signal is still a little hazy. Stocks have endured a serious beating over the past ten months, and the NASDAQ has shed 25%. Viewed from a broader perspective, stocks remain squarely in a bear market. Making matters worse, this bear market is still young. It would be unusual for it to be over so soon.

As the IT buy signal sets up, the chart below shows early areas of strength. Relative to their 50-day EMA's, small caps and tech stocks are off to the strongest start. The notable laggard is the MID. Its heavier weighting in commodity-related stocks now works against it.

Good luck trading, and please continue to check in at The dk Report charts. In lieu of regular posting, this list is kept up-to-date.

best

dk

Swamped

2008-06-11T14:16:00.000-07:00

I'm a little busy right now or I'd write more, but the The dk Report Charts have been updated.

Good luck trading.

best

dk

Darkening Skies

2008-06-10T15:16:00.000-07:00

The dk Report Charts have been updated, and near-term market conditions have worsened. Keep an eye on The 5-10-20 Timer and the TOF Ratio (charts 4 and 5) for a change in the intermediate signal.

Good luck trading.

dk

Time Machine

2008-06-09T15:40:00.001-07:00

Stocks printed a forest of needle bottoms on Monday, as news spread that the new 3G iPhone is so awesome that it allows users to travel back in time and buy gas at cheap prices.

Even if Jobs is a liar, buyers refused to give up on stocks for at least one more day. Not only did stocks reverse course, NASDAQ volume declined for the second straight session. The Composite has notched just three distribution days during this 3 1/2-week correction, and Friday wasn't even one of them.

For all the oil-soaked drama last week, selling pressure -- especially for tech stocks -- has lacked the panicked intensity of a market rolling over. Selloffs often start slowly and build downside momentum, but so far, the bulls aren't making it easy on the bears.

The NDX below shows Monday's needle reversal off the 50-day EMA on lower trade. This is the hallmark of a bid pull -- not of crowded exits. The correction may continue, but Monday's action isn't the stuff of a market poised to retest the March lows.

The blue chips are notoriously saturated with the laggard sectors, and so have deeper problems than the NASDAQ. The SPX has spent two-thirds of 2008 trading in a 60-point range. The bears need to seize this opportunity and push the SPX down out of the purple box below.

Finally, there's a heavy dose of economic data this week, suggesting very intense trading ahead. In addition to the obligatory crude inventories, there is also the Biege Book, Initial Jobless Claims, Retail Sales, CPI and Michigan Sentiment. In light of the current climate, potent pin action is possible off of any of these data.

I'll check in when I can, and until then, good luck trading.

best

dk

The dk Report Charts

Correction Looks to Extend

2008-06-08T22:03:00.000-07:00

The current correction has tightened its grip on equities once more, and further near-term downside appears likely. Season risk to taste.

It's worth noting that -- for all the gloomy commentary -- various intermediate indicators still remain positive, and the NASDAQ is outperforming the more financial- and manufacturing-rich NYSE indexes. How long this lasts is another thing altogether, as the market has resumed its hyper-sensitivity towards negative news.

In lieu of a more detailed post, The dk Report Charts have been updated. I'll write again when I can, and until then the charts will stay current.

Good luck trading.

dk

As as odd as it may seem, some are surprised at $4 gasoline.

New Lease on Life

2008-06-05T22:55:00.000-07:00

There's nothing quite as bullish as a market that keeps going up -- except for one that keeps going up against an onslaught of terrible economic news.

Just 14 sessions after starting a correction, the NASDAQ printed a new, six-month closing high. In fact, the NASDAQ hasn't closed this high since the second trading day of 2008. Thursday's close extends the March rally to a 12th week, and gives it a fresh set of downs. While it doesn't make much sense now, for some reason investors are looking across the valley to the other side.

The chart below shows that the NASDAQ remains in the uptrend channel begun in March. Even though a gap remains below, the index has room to run, and New Highs are accelerating.

One of the most encouraging signs for the market is its renewed appetite for small-cap stocks. Markets do best when riskier asset classes lead, and leadership in young, small companies is generally a sign of market health. The declining green line in the ratio chart below shows that, for the past 2 years, large cap stocks have predominated.

However, in May the small-cap ratio broke above its 26-month downtrend line, indicating a shift in trend to smaller stocks. This is an encouraging development, and an early sign that a new market cycle is trying to take shape.

The chart below illustrates small-cap strength even further. The MID tagged a new YTD high in May, and the SML did so on Thursday. Large cap stocks lag far behind.

Stocks are under accumulation by institutional investors, and gains can be made by following their footsteps. Watch for stocks that surge on heavy volume, especially those hitting new highs. Breakouts are growing more abundant, another good sign for the market.

Maybe not on Friday, but stocks look ready to eventually move higher. I'll continue to post when I can, but The dk Report Charts have been kept current. Check there for interim commentary.

best

dk

Sellers Arrive

2008-05-21T22:21:00.003-07:00

On Wednesday, the bears filled up the tank with $123 oil and took a long-awaited joyride.

After a slow start, the budding correction has finally tightened its grip. While the NASDAQ printed only its second distribution day in the past four weeks, the NYSE indexes logged their 6th. Wednesday was a bad day for the bulls, as 92 of 100 stocks on the NDX closed lower, and all 30 Dow stocks ended down.

Despite the NASDAQ's relative outperformance of late, the expanding cluster of NYSE distribution days is a threat to the current rally. Since this particular rally sprung up during terrible economic times, the risks are even greater. Season your exposure to taste: if you can't take your eyes off the screen, you may be carrying too much risk.

The chart below shows a couple of possible downside targets for the NASDAQ. Filling the gap around 2350 would be a garden-variety correction and about a 10% pullback. If the NASDAQ spends more than a few days trading below 2260, it's probably setting up for a fresh leg down and a lengthy extension of the current bear market.

Corrections often start slowly and accelerate quickly, so caution is important. However, it's worth noting that for all the headline-induced drama on Wednesday, the selling wasn't as intense as the price drop suggested.

Even though the NDX fell a hefty 2.2%, a rather unremarkable 41 of 100 stocks printed distribution days. The OEX fell 1.6% and even closed below its 50-day EMA, but only 34 of 100 stocks saw heavy selling. The IBD100 saw the lightest selling of all, slipping just 1.2% with only 31 stocks seeing distribution.

By contrast, in several sessions during the January collapse, 90+ stocks on these indexes saw heavy selling. If this correction doesn't deteriorate to these levels and take out the March lows, it can recover and continue higher. Reduce risk to your comfort level, and then follow the proceedings with a clear head. Up or down, you'll reap greater rewards following the market than by trying to anticipate it.

As a parting shot, Thursday's edition of Investor's Business Daily offers a few tips for riding out a correction, and they're worth mentioning here:

-- Raise cash. It's the simplest way to reduce risk and ride out the storm.

-- Sell your losers. If a stock is down 7% from your buy point, it's an automatic sell. A stock down less than 7% can be asking for trouble too.

-- Sell stocks with small gains. If a stock has just a small gain, it can turn into a big loss quickly.

-- Consider holding onto your leaders. The best stocks often weather turbulent conditions in tact, and then recover first.

-- Avoid new buys. The odds are against you until the market sorts itself out.

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

I'm traveling until next Tuesday, and will try and check in over the long weekend. Until then, good luck trading.

best

dk

The Herd

2008-05-20T18:01:00.001-07:00

Since the entire herd was expecting this pullback, it should come as no surprise that the downside move has been so stingy.

As The Worst-Is-Over Rally gives way to the Told-You-So Correction, it's noteworthy that NASDAQ volume has declined for two sessions. Considering that the market was actually mixed on Monday and the NASDAQ has eased just 1.6%, it's clear that institutional investors are reluctant to unravel their nine-week buying spree. Throw in economic gangrene and oil approaching something like $1 million/barrel, and the bulls look remarkably tough.

After three days of selling, little technical damage has been inflicted on the NASDAQ, while the various secondary indicators have all had a chance to cool off a bit. After a weak start to 2008, the NASDAQ is now the market's leader. It's logged just 3 distribution days in the past 8 weeks, while tacking on over 300 points. As energy stole headlines on Tuesday and NYSE bellwethers sank, AAPL, RIMM, GOOG and BIDU all quietly closed higher.

On the other hand, the Dow is absorbing some heat, and has seen 6 distribution days in the past 5 weeks. Two bear raids in 11 days left a nasty double top, and it looks like the Dow has more work to do before it's ready to move above resistance. The $OEX is printing a similar formation.

It's hard to make the stock market stay down without heavy selling, and there's been little of that so far. On Tuesday, just 19 stocks on the NDX printed distribution days. Even more boggling, a mere 5 stocks(!) saw heavy selling on the IBD100.

Tomorrow offers another day for the sellers to step in, but the current action is telegraphing a market in profit-taking mode. Given there's every imaginable flavor of weak economic news at the bear's disposal, it will be interesting to watch investors sort this one out.

Until then, have a great evening.

best

dk

Time for a Pullback?

2008-05-18T15:16:00.001-07:00

There's almost uniform agreement among technicians this weekend that, even though the market has grown more bullish, stocks are due for a correction.

Many investors looked to OEX this past week for the selling to pick up. However, the week after options expiration is actually far more famous for market tumbles. As a result, it's possible that the sellers finally show up this week, with downside acceleration into the long weekend. However, the market has made so many technical improvements over the past nine weeks that remorseful non-participants could be eager to buy any weakness.

Long-term indicators still say we're in a bear market, and broad economic conditions range from mediocre to awful. However, nothing is more bullish than a market that keeps going up. Most investors have been surprised by the tenacity of the current, nine-week rally, and a wide array of indicators show an ever-strengthening market pulse.

One of the more popular Bull Market/Bear Market Indicators involves the 65-week EMA. It's a reliable long-term indicator, and there's even a public chart list at Stockcharts called Above the Green Line which is based on the 65-week EMA.

The chart below shows that the SPX has now climbed back above its 65-week EMA, after spending the past six months below. Also, RSI is back above 50. However, it's worth noting that Above the Green Line isn't impressed, and views this as the last chance to sell before the market turns really bad.

The reason for the skepticism is evident in the chart below. The 13/34 weekly EMA is one of the most commonly followed long-term bull/bear indicators. Until the blue line crosses back above the red, the trend is still down.

However, things can change. In the world of Dow Theory, all three components bullishly broke above key resistance in mid-April, and have held above ever since. It's old school, but Dow Theory has a long history of reliability and has some high-profile practitioners.

Another chart with longer-term bullish implications is the Cyclical Ratio. It's currently near an all-time high, even as the SPX lags far behind. Relative strength in the Cyclicals is positive for the market outlook.

Market tops are difficult to call, and the reminder du jour is the energy market. Even though USO was throwing off important divergences two weeks ago, it moved even higher this past week -- on even more astonishing volume! It's a great lesson in market mechanics, and a cautionary tale about jumping in front of a moving train.

The significance of what the market does from here depends on your time frame. While a short-term correction in the next few weeks is a decent bet, there are few indications that stocks are ready to collapse to their March lows.

One of the most compelling reasons for this is that stocks with the very best fundamentals have been breaking out to new highs en masse for weeks. The IBD100 has had a thundering performance since mid-March, and has seen an ever-widening group of stocks participating in new highs. This is rare behavior for a rally doomed to failure.

Eventually, the market will sell off, probably to a chorus of "told you so's" and epic QID trade. However, unless investors produce a crop of 4-5 distribution days in a two week span -- and the IBD100 falls apart -- participants will likely step in and buy the dip.

Good luck trading, and I'll write when I can.

best

dk

The dk Report Charts

Calm

2008-05-10T08:13:00.000-07:00

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.

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.

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?

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.

best

dk

  For additional charts and commentary, see The dk Report Charts

Oops

2008-05-07T16:46:00.000-07:00

After a steady string of gains, stocks took a plop on Wednesday.

In mid-January, 5-year trend lines were broken signaling the start of a new bear market. Until this long-term damage is repaired, rallies such as the current one are countertrend. This makes them subject to harsh interruptions -- and even quick endings.

It's too early to tell which is now in play. The bears have every imaginable fundamental advantage, but they haven't been able to capitalize on it for weeks. They'll definitely have another shot at it tomorrow.

The 13/34 EMA chart below is one of the classic Bull Market/Bear Market indicators, and it shows the cycle change in January. Until the blue line is back above the red, the market can be a fair-weather friend.

Big volume selloffs like Wednesday's happen in all market climates. Whether the rally is over -- or just taking a break -- is often answered at tests of key support. A trip down to the blue 50-day EMA would be a garden-variety 5% pullback. If that fails, key support is 2250 (a 10% slide). Below that...

Days like Wednesday can be the start of volatility that takes weeks to sort out. Despite its questionable statistical underpinnings, the sell-in-May adage comes to mind as well. How you play a situation like this is determined by your risk tolerance and investment horizon. Regardless of your approach, expect choppy market action.

FYI - no notes on Thursday.

best

dk

The Highs & Lows of Cinco de Mayo

2008-05-06T08:14:00.000-07:00

Perhaps it was the tequila, but on Monday, May 5 -- Cinco de Mayo -- there was an interesting series of three posts on the use of the SPX High-Low Index to help time the market. I use this indicator as well, and three posts in one day caught my eye. What struck me is that I apply the SPX High-Low across a slightly different timeframe, and so am adding a fourth post to the discussion.

-- Bill Luby at VIX and More smoothes the High-Low Index with a 20-day EMA to identify intermediate oversold levels and changes in trend. It's a solid approach, a good article, and is one that makes similar observations to my own.

-- Babak at Trader's Narrative uses an intermediate time frame as well, but smoothes with a 10-day MA. Babak posted on the SPX High-Low Index because for him the indicator is currently suggesting caution. While it's not flashing an extreme, Babak senses that the index is nearing an overbought condition. "The easy money has been made in [the SPX] trade."

-- At Investor Village, in a response to Bill Luby, pcyhuang offers an alternative interpretation. It takes the daily readings of the SPX High-Low and applies Parabolic SAR. Since the daily High-Low data are extremely volatile, pcyhuang's version is very jumpy. With unsmoothed, daily SAR settings, this version of the indicator favors short, 3-14 day time frames.

---------

I found these posts interesting because I discovered the accuracy of High-Low as a Buy/Sell indicator resides more in longer time-frames. In other words, I'd been burned over the years by applying short and intermediate time frames, and found accuracy only after tweaking the time frame longer.

The chart below reveals how a 10-week EMA of the SPX High-Low Index is useful in identifying key, cyclical changes in market trend. The biggest caveat is that High-Low is at its best in picking bottoms, and is dicey at picking tops. At indicator tops, stocks can rally on for months, even as the indicator throws off multiple sell signals. However, extremely low readings provide decent bottom calls.

Over the 6-year period below, the 10-week EMA oscillates in a channel between 50 and 90. You can see that extremely high readings generated numerous false sell signals ( a cross below 90). However, extreme low readings marked both the 2002 and (potentially) 2008 bottom. Crossovers above 50 trigger a cyclical buy.

The takeaway is that the SPX High-Low Index below is currently triggering an important cyclical buy signal for the market, but it remains unconfirmed.

OK now pass the guacamole.

best

dk

Yin and Yang

2008-05-05T16:09:00.001-07:00

On a day that Yang and Ballmer (not pictured) are unlikely to forget anytime soon, stocks pulled back on quiet trade yet again.

Except for YHOO, institutional investors showed little interest in unravelling positions built up over the past seven weeks. Monday's action was another example of the stock market's improving behavior, and careful observers of market internals saw these improvements begin weeks ago.

The chart below shows that important positive divergences began developing during the series of lower lows between Jan-Mar. As the NASDAQ continued falling, the number of stocks actually hitting New Lows decreased. At the same time, the number of stocks printing bullish P&F formations steadily increased.

This divergence means that the index declines were being caused by a smaller and smaller number of stocks (mostly financial and consumer). However, this small group of stocks was falling so hard that it was masking improvements in other sectors. Once the toxic selling was exhausted, the majority of stocks assumed control and drove the indexes higher. The climbing New Highs and Bullish Percentage Index are two things giving the rally legs.

Adding to the mix, the indexes now remain parked above important resistance. Despite the well-known fundamental headwinds, the odds favor stocks eventually continuing their climb. It will likely include at least one 3-5%+ pullback, but a variety of internal indicators suggest that this rally could continue for a while.

Until tomorrow, have a great evening.

best

dk

Rotation Ahead

2008-05-03T16:16:00.000-07:00

On the heels of a strong up week for stocks, the market cooled its jets on lower trade Friday. This is ideal market action after a surge, and suggests that soon enough, more gains lay ahead.

Adding to the bullishness, all of the indexes except for the RUT are now confirmed above their 200-day EMA for the first time in six months. This is an important development, and is the product of institutional buying, Many mistakes are made on Wall Street, but there are few accidents.

So, after such a run-up, what can possibly push this market higher? Economic data is lighter next week, earnings wildcards continue and risk of credit nightmares persist. Even if the market pulls back next week, the real source of further gains is likely to be something more simple and powerful: good old-fashioned rotation. Investors are selling bonds and commodities and buying equities, and this rotation will likely push stocks higher.

The chart below shows that the 10-year Treasury is a smoking gun behind the recent surge in equities. This was the 7th straight week that the 10-year tumbled, and it hasn't even broken critical support yet. If the Fed is almost done, expect more bond selling, with those proceeds moving into equities.

Commodities are showing increasing signs of wear, and the CRB has formed an unconfirmed double-top. This is accompanied by an expanding bouquet of negative divergences. It's worth noting that the CRB is overweight energy, and this fact distorts the breadth of commodity weakness. You can see this in the CCI chart below. The CCI is equal-weight commodities, and has already made a bearish lower high.

Because the market violated a 5-year uptrend in January, a bear market remains in play. In such an environment, stocks generally rise in jagged rhythms and rallies often end abruptly. The irony is that bear markets also produce the biggest market gains, especially as they come to an end. Unfortunately, few investors are ready when the worm turns, and so the market rises with the fewest number of investors participating.

The best tell for the market's next leg will be bonds and commodities. If selling persists in these asset classes, stocks will continue to rise.

best

dk

The dk Report Charts

Top Ten Myths About The dk Report Hiatus

2008-05-02T08:09:00.000-07:00

Over the past eight months, I received a lot of comments, messages and e-mails about taking a break from blogging The dk Report. Most were kind and thoughtful, and thanks to each of you for taking the time to write.

But several were pretty weird. The most unusual of these involved bizarre rumors hatched from the fertile womb of the internet. Below are ten of the best myths I heard about The dk Report hiatus, and all came from actual communiqués sent or forwarded to me.

1. I was not immobilized by clinical depression over the death of Luciano Pavarotti (I received more notes of concern about this than on any other topic. Note to self: never leave an admiring obituary posted on your blog for 8 months).

2. dk was not a pseudonym of Luciano Pavarotti, and the posts did not end because he died.

3. I was not hospitalized for any reason whatsoever, including a heart condition or a grief-stricken overdose of anti-depressants (see #1 above).

4. I didn't stop because Bill Luby and I are actually the same person, and he decided to quit posting under multiple aliases (Bill...you came out on the short end of this stick, and I offer you my sincere apologies).

5. I didn't stop blogging because I lost all of my money a) on a Nigerian 419 scam, or b) refusing to abandon a losing short position on BIDU.

6. I didn't quit because of I took a new job in hotel management.

7. I did not receive a cease-and-desist letter from Becky Quick (you know this is true, because if I had, I would have posted it immediately).

8. scduo4fun and I are not the same person either, although coincidentally he does live just a few miles from me.

9. The decision to quit posting had nothing to do with the Oscars®.

10. My hiatus had nothing to do with Texas barbeque and beer, although I could be persuaded to stop blogging again for enough New Braunfels sausage, Pedro's tamales and Shiner bock (shipping address available upon request).

best

dk

Resistance

2008-05-01T23:39:00.000-07:00

The market made it back to critical resistance on Thursday. Both the Dow and NASDAQ have punched through their downtrend lines, but the SPX is parked right on the line.

Friday's jobs number is the likely catalyst for short-term action -- up or down. The market looks prepped to handle a shaky number, but we'll see.

The dk Report charts have been updated, and will continue to stay current.

Good luck trading.

best

dk

Farewell, Luciano

2008-04-29T21:38:00.010-07:00

It's been over 8 months since I've written a financial post, and I've missed it more than you can imagine. Rest assured, I've stayed fully involved in the market during the entire period, but an epic work schedule has simply prevented me from writing about it. It's one of the only regrets I have about how time-consuming my day job is.

A special thanks for the many colorful comments and e-mails you sent. Unfortunately, many of the ~~weirdest~~ best of these aren't printable.

Judging from your remarks, it appears that the biggest accomplishment of my hiatus was to single-handedly disgrace the memory and career of Luciano Pavarotti. Readers grew to loathe that post, and in many cases, the very man himself. I regret this most of all, and am sorry for any discomfort that a frozen, 8-month old post caused for so many. I promise I'll never leave another post up for longer than four months -- max.

Since my work load continues ad infinitum, I've decided to try something different for The dk Report. I've annotated a set of charts in my Stockcharts public list. These are live charts, current with ongoing commentary. It's a simpler, more efficient format to present technical data, and one that is definitely easier to maintain. There is less prose, but the list contains most of the charts I included in my posts here - all live, and all in one place. Regardless of what happens here, the charts will always stay current.

So, bookmark this link and stay current with The dk Report. Feel free to check back here as well, especially when you feel the urge for some opera.

Enjoy the charts, and thanks again for all of your support.

best

dk

Luciano Pavarotti (1935-2007)

2007-09-06T09:02:00.000-07:00

As the financial markets swirl on -- all journey and no destination -- the loss of Luciano Pavarotti is an event of generational significance.

100 years ago, the world was taken by storm by Enrico Caruso. It's important to grasp that Caruso created the modern recording industry. The most popular singer in any genre for over 20 years, Caruso made nearly 300 recordings by 1920, and drove the adoption and early success of 78 rpm technology. If you owned a Victrola, you owned a Caruso 78. Caruso was deservingly awarded a posthumous Grammy in 1987.

But then came Pavarotti.

As I entered college in 1977 to study music, Pavarotti was at his peak. I knew little opera at the time, and got my primer sitting in my dorm room with friends listening to him famously nail the 9 high C's in Ah! mes amis, quel jour de fête! from Donizetti's "The Daughter of the Regiment". Pavarotti had a titanium voice -- paradoxically both light and strong. Ah! mes amis was an "a-ha" moment for me, one that sparked a life-long love of opera. I would go on to compose an opera for my dissertation, and have started a second opera this past summer.

By the time of Pavarotti's reign in the 1970's, music had become so stylistically fragmented that it's difficult for many to understand his significance. Not only did he have a twice-in-a-century voice, one of Pavarotti's greatest contributions was that he eagerly embraced popular music. This was very controversial in the stodgy music world, but Pavarotti knew that opera originally WAS popular music. He saw this connection, and reminded us that music is as much a social experience as it is a musical one.

The 20th century saw two of the greatest operatic tenors in history, and it is a cherished thought to know that I was there for one of them.

Mi mancherai.

best

dk

Pavarotti Nessun Dorma

Pavarotti with Queen

Pavarotti with James Brown

Pavarotti with Barry White

Big Week Ahead

2007-08-26T16:11:00.000-07:00

After a great road trip, I got back to LA last week and found myself working on four projects simultaneously. It's a great problem to have, but one that will impact my posting schedule for many weeks to come.

Thanks to everyone for the thoughtful e-mails, messages and comments. I'll do my best to keep in touch as I work through one of my busiest schedules in years. ---- dk

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

The raging debate in the financial press, blogosphere and on message boards is whether or not we've tagged an IT bottom. With such a divergence of opinion, it's critical to try and grasp what the market itself is saying. Read everything you can, but always trust the market.

From the market's perspective, the outlook is still murky, but with a bullish bias. How long this bias lasts is unclear, but last week the sellers lost momentum.

An important consideration going forward is that V-bottoms are extremely rare. As the story goes, if money managers feel that a bottom is in play, they simply stop buying to get better prices. Without huge money, stock prices eventually slide, weak hands sell and the pros scoop up the slop at prices that interest them. In the world of TA, a double-bottom is born, and they're painful, uncomfortable experiences for the unprepared.

The rub is that the few times that V-bottoms actually work is during market events like this one. Two weeks ago, perfectly good positions were sold -- and perfectly bad ones were covered -- all to raise cash for reasons unrelated to those positions. The market hiccuped on non-fundamental selling, and this raises the odds for a spastic V-bottom to hold.

Of course, this is no prediction. Charts map market fundamentals and not the other way around. The fundamental question is whether the credit market has another shoe to drop, and what the market will do if this proves true.

To help understand these two questions, below are eight observations of the market itself:

1. Sizing Up the Correction

In just 20 sessions, the NASDAQ corrected 12.4%. While this felt dramatic at the time, the chart below shows that this was the skimpiest "correction" of the five since the Oct 2002 bottom.

Even more interesting, last week's skinny red spike shows that the market was very reluctant to give up even that much. The Composite spent just 40 minutes below 2400, and only 20 hours below 2500. Then, in just 7 sessions it regained more than half of the pullback.

This is quirky behavior. It's also consistent with derivative-based unraveling -- a grand "margin call" -- and not necessarily some sea change foreshadowing an economic slowdown.

2. Volume

Last week's light volume caught everyone's attention. NASDAQ trade came in 14% below normal, and it was the 4th lowest weekly total of 2007. Making matters worse, the other three weeks were all holiday-shortened.

Meanwhile, the Composite gained 2.9%. It broke out of a descending price channel, closed above the 50-day, confirmed above the 13-day and cleared the 61.8% Fib re-trace. Those are important moves, made even more so by their pack-like proximity.

It's worth remembering that two weeks ago trading volume saw it's highest total in US stock market history. After big selloffs, markets are famous for leaving the station with the fewest number of investors on board. Sellers are exhausted and buyers are skeptical. So, markets rise on low trade, and this is exactly what happened in August 2006.

A low-volume rise is technically a red flag. However, the market has just had a big convulsion. In this context, it's a murky signal at worst, and only more trade can clear it up.

3. McClellan Oscillator

One of the most compelling charts continues to be the McClellan Oscillator. The McClellan Oscillator measures breadth, and is a momentum indicator of advance/decline statistics. It charts the difference between moving averages of gainers and losers, a process which smoothes out the noise. It's also very fussy and difficult to impress.

Therefore, it's remarkable that, after four weeks of positive divergence, the McClellan Oscillator is now printing a new 2007 high! This is a one-two positive punch for the stock market, and it's a sign that the selling has been focused on a narrow set of targets. Crossing zero marks the "buy" signal.

4. Volatility

Would you buy this stock? While it looks ripe for a bounce, the VIX is also making an impressive case that an IT top is in. Someone thinks the worst is over, and this is bullish for equities.

5. Bond Contagion

The chart below shows that bonds swooned heavily before the equity market did, then began recovering. As equities fell apart, all three classes of bonds held on to their recovery. In a world of credit hurt, this is important.

The mortgage market is a complete mess, liquidity is an ongoing problem and consumer credit is next. However, the bond market continues to avoid the signal of a more widespread catastrophe.

6. 5-10-20 Timer

If the market holds up this week, the 5-10-20 Timing Indicator will trigger a buy in the next few sessions. That's a big "if", and timers can give false signals in either direction. However, if the signal is decisive, the 5-10-20 is one of the most reliable timers of all.

7. TOF Ratio

For all the VIX shenanigans, the option market itself stayed surprisingly cool-headed. As a result, the TOF Ratio didn't even stretch down to its lower boundary, and is setting up for a buy signal.

8. Investor Sentiment

Finally, like the Hulbert Index, Investors Intelligence tracks the sentiment opinions of professional advisors. It's hard to see in the chart below, but the Investors Intelligence Bear Percentage is now 37.4%, a 4 1/2-year high. While individual investors are still very sanguine, the pros are noticeably bearish, and this indicator is reaching extremes typical of bottoms.

The market gets a slew of economic data this week and ends with a three-day weekend. This week is going to count, and all signs point to higher trading volume. It will be interesting to see if the bulls can capitalize on their thin-volume bias.

Have a great week, and I'll check in when I can.

best

dk

Weak

2007-08-15T20:44:00.000-07:00

There shall in that time be rumors of things going astray, erm, and there shall be a great confusion as to where things really are, and nobody will really know where lieth...those little things with the sort of raffia-work base...that...has an attachment.

---- Boring Prophet, Life of Brian

I'm not much for financial prophecies -- especially ominous ones -- but the market continues to weaken in ways that suggest more weakness. The NASDAQ ended a 2-hour afternoon selloff with a close below its 200-day. Even worse, volume surged 15%. The internals are a rogue's gallery, and the IBD100 tumbled 3.6%. Just 8 of 100 IBD100 stocks closed higher.

On the other hand, a good friend of mine is in sales, and I asked him once how he kept going during long stretches of rejection. He replied, "I remind myself that each 'no' is just one step closer to a 'yes'."

A wide array of indicators are growing more and more oversold, as the market steps closer to a bounce/bottom/zero. Unfortunately, price can easily keep falling long into oversold conditions, but we'll see.

I'm on the road so this is short. I'll try and touch base again tomorrow.

best

dk

It's unfortunate to see that the Cyclicals closed below their 200-day on Wednesday.

From One Perception to Another

2007-08-14T20:30:00.000-07:00

It's a zero sum game, somebody wins, somebody loses. Money itself isn't lost or made, it's simply transferred from one perception to another. ---- Gordon Gekko

Thankfully, investors didn't lose any money on Tuesday. They just saw their stocks transferred from the perception of being higher to that of being lower.

This perception shift appears likely to repeat itself. Every index except the RUT printed fresh, 4-month closing lows on Tuesday. Also, none of the rally attempts have survived, which means that the market is now searching for Day 1 of a new, potential bottom.

Of course, every session has some type of divergence, and Tuesday was no exception. In this case, Tuesday's price slide was accompanied by low volume. Stocks fell a long way under little selling pressure, and during option expiration, this is always curious.

There's no way to prove it, but Tuesday's step-down action looked like a calculated bid pull, designed to help options traders heal wounds. Days like this can then be answered by brief rallies, also contrived to de-fang option trades. This is a weak market, but with a 27-handle VIX, anything's possible. If the market does manage to rally, it will be sold into, so be careful.

Market internals and leading stocks are not offering promising signs for the bulls. Breadth, Buy Volume and New Highs show a market in distress (see charts). The bigger problem is that none of the indicators are at extreme levels of weakness typical of contrarian buy signals. Adding to the problem is that the IBD100 plunged 2.8% as just 13 of 100 stocks moved higher. It's never good when a proxy for stocks with the very best fundamentals does worse than the broader market.

Once the NASDAQ slips below Fib 38 -- around 2480 -- it's in no man's land. A variety of targets become feasible, and institutional investors will have buy programs keyed to all of them. 2450 is a 10% pullback; 15% would be a retracement all the way back to the March low. The mathematical favorite is probably Fib 19 (not pictured) around 2400-ish. However, we're in credit market hell, so who knows?

The chart below shows the synchronized support violation mentioned above. From a TA perspective, this coordinated weakness is bad news.

Below is another look at some IT bottom finders. These all include the 2002 bottom as a reference, and each says the same thing: we're not at a bottom yet.

The High-Low Indexes for both the NASDAQ and NYSE are getting close, but would benefit from more selling.

NASDAQ stocks above their 50- and 200-day are getting close too, but these charts also need a fresh leg down to push the indicators to extremes.

The NASI breadth indicator broke a 5-year trendline off the 2002 low. This suggests that this correction is the real deal, and will be successful in wringing out excess. It also implies that stocks could go lower than many investors suspect.

So far, this correction has a bizarre, unpredictable quality to it that's about de-leveraging, illiquidity and other serious matters. However, there's no evidence that the weakness is about an economy tipping into recession. As a result, it's worth repeating that remarkable opportunities are being created through the mis-pricing of equities. High quality watchlists will come in handy soon enough.

I leave early tomorrow morning for four days on the road. I'll try and post if I can. However, it's another grueling itinerary that gets me back to the hotel late each night.

It should be a wild rest of the week for stocks, and I'll try and catch up on the weekend.

best

dk

The Day After

2007-08-13T20:30:00.000-07:00

After a promising start, stocks faded to unchanged on Monday as the market nursed a wicked hangover.

Volume started out heavy, but faded dramatically as the day wore on. By the close, NASDAQ trade was off 31%, and leading stocks put in a similar, bleary-eyed performance. The IBD100 edged up 0.2%, but 94 of 100 stocks traded on lower volume. Strong open or not, institutional investors remain cautious.

Volatility has been so wild recently that it may come as a surprise to learn that stocks have actually traded in narrow range for the past 13 sessions. Also, price losses for the broader market are still relatively minor, with the Dow off just 5.6% from its high. The indexes are all consolidating at their 200-day or 50-day, and after experiencing the heaviest trading week in history, stocks still aren't in an official correction yet.

In the face of all of the uncertainties surrounding the credit markets, this sideways action has produced a growing sense of bullishness among some experts. Below is a random sampling of this and other bullish indicators, and there's much more of it out there:

--- Bill Cara is one of many who believe that the liquidity injection will lift stock prices.

--- KingCAMBO makes an interesting Camtasia presentation on the XLF that suggests The Fix is In, and big money is flowing back into financials.

--- Bill Rempel uses a variety of Predictive Models, and his 20-day versions remain positive for stocks. He notes that regression models are offering good odds, and that his fav EMA-based trend is still up.

--- Carl Futia offers a contrarian observation: while stocks have gone nowhere, the media has grown more bearish. Barron's, the New York Times, Chicago Tribune and Business Week Online have all published bearish front page stories.

--- In another contrarian bullish take, Mark Hulbert notes($) that the HSNSI has fallen off a cliff and is now down at a stunning 5.4%. Just four weeks ago, it was at 50.9%! While the Dow fell 5.5%, HSNSI slid 45 percentage points, a move contrarians would suggest is a tad overdone.

--- Goldman is making a bullish move from the belly of the beast, pouring $3 billion back into the deeply wounded Global Equity Opportunities quant fund.

--- There's definitely no signs that the US or global economies are rolling over, and Q2 earnings season both beat expectations and offered decent guidance.

--- Finally, there's a hodgepodge of various technical bottom finders and volatility metrics nearing extremes common at important IT bottoms.

So, are we near a bottom?

It would certainly make things simpler, but very weird clouds remain on the horizon.

--- On Thursday, both the Dow and NDX undercut their previous low, killing the new IBD rally on Day 8. The "Current Outlook" of Investor's Business Daily has returned to "Market in correction".

--- VIX and More notes that the commercials are heavily long VIX calls. This is the "smart money", and it points to continued equity downside ahead.

--- In an interesting twist, one of Bill Luby's readers noticed the purchase of 30,000 Aug 25 VIX calls on Monday. This is a $7.5 million bet that the VIX will close above 27.5 by Friday -- a big negative for the stock market. Such a large, professional move led Bill and others to wonder if another fund is about to liquidate on a massive scale.

--- Speaking of options, Jim Kingsland notes in his CNBC Options Report that despite Goldman's $3 billion GEO ante, options players aren't bullish on XLF, with puts swamping calls 2.5 to 1 on Monday. Is this another not-so-subtle hint that more fund liquidation is ahead?

--- The current index consolidation at 200-day support looks like a bottom. However, it could easily be a setup for a fresh leg down. Numerous technical indicators give this possibility above-average odds.

--- In a troubling sentiment note, the AAII Sentiment Survey shows that individual investors are surprisingly sanguine about the current pullback. At 46% bullish, this group has a long way down before it reaches historic bottom territory.

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

Strong arguments for both the bullish and bearish case are being made by experienced professionals. However, this fact alone suggests that the pullback may not be over. Historically, a sentiment extreme needs to be reached before corrective behavior is complete, and this is clearly not the case. Also, despite last week's heavy volume, an exhaustive price extreme was never reached either. Lastly, it seems very unlikely that the financial sector has given up all of the skeletons in its closet.

In the end, a strategy is perhaps most influenced by one's time horizon. With your time frame in mind, adjust risk to taste.

And get ready for another ride 'round the track.

See you tomorrow.

best

dk

Injections

2007-08-11T21:42:00.000-07:00

Liquidity injections can smooth out the wrinkles in financial markets, but the effects are both mildly disfiguring and very temporary.

In less than 48 hours this week, the central banks of the US, Europe, Canada, Japan, Switzerland, Australia, Singapore, Malaysia, the Philippines and Indonesia injected over $326.3 billion of liquidity into the global financial markets. A whopping 65% of this infusion -- $213 billion -- occurred not in the US system, but in Europe.

This was the largest global liquidity injection in history, and it's ironic that the US pump was a paltry $62 billion, one-fourth the size of Europe's.

There was also a jargon injection, with "statistical arbitration" and "quantitative funds" added to a growing list of arcane credit terminology popping up in the mainstream press.

The market also saw a volume injection, as this marked the heaviest week of trading in US stock market history. The kicker is that even though volatility reached record highs, the stock market paradoxically edged higher as well.

What's going on here?

Hard to say for sure, but below are eight observations:

1. The Stock Market
The financial markets have become more irrational than they've been in years. The source of the problem is that mortgage-backed securities -- a huge asset class -- have become difficult to value. Wall Street hates uncertainty anyway, and when it extends to the value of an entire asset class, it's a big problem. Massive positions are being liquidated for reasons other than fundamentals or technicals, making this an unusually risky time to own stocks. Because so little has been resolved, it's going to get worse before it gets better, probably much worse.

2. Statistical Arbitration and Quantitative Funds
Stat-arb is the latest variation of black box strategies in use for decades (LTCM was brought down by a variation of these). Really smart guys with computers exploit tiny, statistical abnormalities in the relationships between various securities. The spreads are so small that enormous leverage -- up to 10 times -- is used to make them profitable. The problem is that in an emergency, it can take 10 times as long to exit a position. When the emergency is in an illiquid asset class -- like mortgage securities -- it can really get out of hand. Perfectly good stocks get sold en masse to raise cash, which in turn triggers stops at other firms, and so on. The irrationality can accelerate rapidly.

3. Liquidity Injections vs. Rate Cuts
Because the FOMC didn't cut rates on Tuesday, Fed critics feel vindicated by this week's liquidity pump. However, liquidity injections and rate cuts are very different tools. Liquidity can be highly targeted (the Fed bought high-quality mortgage paper this week) and is very short-lived. Rate cuts are a blunt instrument capable of producing unintended consequences. The effects are also much more long-lasting.

4. Bail-Outs
There's widespread disgust at the thought that the peddlers of shameless credit products are getting "bailed out" in some way. The truth is that the peddlers are paying dearly for the Fed's help. The Fed is holding the market's best mortgage paper for just 3 days. After 3 days, the peddlers have to buy the paper back plus a Soprano-style vig that's roughly 5-19% higher than on the open market. The bad news? This caper doesn't solve the original problem of the subprime toilet paper they still can't sell.

5. Greenspan vs. Bernanke
Thanks to the bias of Greenspan's 20-year reign, an entire generation of Wall Street pros believes that the main function of the Federal Reserve is to be "accommodative". This isn't true of course, and Bernanke's data-driven approach has proved a genuine shock to the system. Despite consistent policy language and behavior, Wall Street refuses to take Bernanke at his word. You can see this refusal in the Fed fund futures and the bond market. After 1 1/2-years, they still resemble more of a Greenspan handicap than an acknowledgment of Bernanke's approach. Bernanke will continue to provide liquidity, but will be slow to cut rates. If things really fall apart, he will of course. But short of that, he'll continue adjusting policy to the incoming data.

6. Frozen Markets
The biggest reason Bernanke will be slow to cut rates is because in the end, lower rates won't solve the problem. Illiquidity has hit the mortgage market because the value of the assets is unclear. In absolute terms, rates are low, and making them lower (a) isn't going to create valuation epiphanies, and (b) will open a can of worms in other asset classes and global economies. Transparency, not cheap rates, is the only true solution.

7. "Malt Liquor Mortgages"
The unspoken secret about the subprime mess is that these products were designed for and marketed to low-income minorities, mostly African-Americans and Hispanics. Comedian Jon Stewart had a great subprime bit on The Daily Show this week. Fellow comedian Larry Wilmore called subprime the "menthol cigarettes of loans", adding "we knew these loans were unfair, that's why we stopped paying them back!" In a cheeky twist on Black Power, Wilmore contends that Blacks are getting back at The Man by using $100 billion in leverage to strip him of power, status and wealth. Protests, voting and riots are dead ends -- using Wall Street against itself is the ultimate diss.

8. The Silver Lining
When the stat-arb boys are forced to raise cash, they sell the market's best companies, and cover shorts on the worst. This crushes hedging strategies in both directions. It's also why the best stocks fell and the worst stocks climbed this week, and a troubled, heavily-shorted market closed higher. The silver lining is that this irrational behavior is creating a large value inefficiency in the market. The economy is in decent shape, yet some of the most best stocks in America are being dramatically mis-priced. There's a bundle to be made when this is over.

Keep some powder dry.

best

dk

Mega-Turnover

2007-08-10T08:46:00.000-07:00

That rumble you hear is trading volume, which is currently tracking at record levels exceeding Wednesday and Thursday's epic totals.

It's very difficult to estimate so early in the day, but for the NASDAQ, EOD suggests the high 3.x billion shares. NYSE is above yesterday's all-time record of 2.8 billion.

Should volume back off from these quick-takes by the close, that would be interesting behavior as well. VIX almost tagged 30 before easing a bit.

A summer to remember for sure.

best

dk

Swim At Your Own Risk

2007-08-09T20:30:00.000-07:00

Watch your back.

One day after the NASDAQ saw its heaviest volume in 2007, the NYSE saw its heaviest trading volume ever. While historical extremes can suggest an exhaustive climax is in progress, this is hardly a foregone conclusion.

Distribution has a long history of killing young rallies, and Investor's Business Daily points out a sobering statistic. The market has seen heavy selling within 3 days of a follow-through session 14 times since 1982. 13 of those 14 times, the rally ultimately failed.

Unfortunately, leading stocks aren't suggesting that this losing streak will be broken. While the NASDAQ shed 2.2%, the IBD100 tumbled 4.7%. Also, after improving some on Wednesday, IBD100 internals weakened on Thursday. 91 of 100 stocks closed lower, while 35 stocks saw distribution. In truth, it's a little surprising that the distribution wasn't heavier on so large a price move with such terrible breadth.

The market is so unstable that short-term predictability is difficult. While further downside seems obvious, the chart below shows that the NASDAQ is also printing a variation on a bullish inverted hammer. It's been approached unconventionally -- and the reliability is low/moderate anyway -- but in this crazy, volatile market, it's best to keep all the cards in front of you.

The odds continue to point to an eventual test of Monday's low. However, the second-highest NASDAQ volume in 2007 produced just a 2.2% slide, which neatly closed the gap in the process. Also, after 7 billion shares changed hands in just 13 hours, the NASDAQ is off a scant 5 points (0.2%). The evidence suggests there's a stealthy bid under this market, but Friday is a whole new day.

There's also more to the credit situation than meets the eye. For now anyway, the broader credit markets don't show the histrionics seen in the mortgage-based areas. In an article on Thursday, Tim Rogers at Briefing.com clarifies the distinction between liquidity demands and a credit crunch, and notes that, while gnarly and unpleasant, both systems continue to function normally.

There is an undeniable need for global liquidity, which the various central banks are responding to. However, Rogers notes that for now, only a small number of commercial banks (4%) are tightening commercial and industrial lending standards. This contrasts with the 60% that did so during the 2001 peak. Rogers writes:

There is no evidence yet of a credit crunch, only the need for cash to stand in for the subprime assets less able to be valued and used as collateral.

The performance of the bond market continues to corroborate Rogers' findings. Below are comparative charts of the 10-year Treasury, high-grade corporate paper and junk bonds that I posted a few days ago. These continue to hold up, as the broader, non-consumer credit market shows some welcome stability -- for now anyway.

Also, both yield curves are now positive, as the bond market still has doubts about the "certainty" of a US recession.

As counterintuitive as it may sound with so many stocks hitting New Lows, growth continues to outperform value. Not only does ELG continue to outpace ELV (see chart), semiconductors were the best performing group on Thursday.

The VIX vaulted 23% to another 4 1/2-year high as the price for an equity prophylactic continues to be no object...for now.

The effects of the credit nightmare are accelerating at the same time that bottom indicators are strengthening. If history is any guide, the growing tension between these two is likely to release itself when everyone least expects it.

Friday should be another doosey. See you then.

best

dk

Rumors

2007-08-08T20:30:00.000-07:00

The rumor mill may have disrupted trading on Wednesday, but stocks managed to put in a solid day nonetheless.

By some counts, it was the best session of the current, six-day rally. The NASDAQ traded 3.55 billion shares, logging its highest volume total of 2007. Also, the Composite gapped at the open -- and then kept going. Just three days after testing 200-day support, the NASDAQ is back above its 50-day.

However, building bottoms is messy business. Markets misbehave and often fail in this zone, and this one is no exception. Stocks may be in a "confirmed rally", but the action is fickle and rumor-prone.

In the end, stocks recovered from Wednesday's gossipy selloff, but this is clearly a "shoot first, questions later" market. While this may sound wise, the final 100 minutes of trading on both Tuesday and Wednesday didn't exactly bear the stamp of wisdom. The action seemed frantic and confused.

Adding to the overall messiness was that a lot of Wednesday's action was bargain hunting. The best-of-breed had another so-so day, marking the third time in four sessions that the IBD100 has trailed the broader market. The IBD100 added just 1.4%, while the NASDAQ tacked on 2%.

That said, leading stocks brightened in an important way on Wednesday. The gains may have been sub-par, but the internals on the IBD100 showed a big improvement. An impressive 35 stocks saw accumulation vs. just 18 seeing selling. Also, 23 stocks jumped to record highs, up from only 11 the day before, and 5 the day before that. This is a tone shift for the market elite, and it's a welcome sign in an emerging rally.

The NASDAQ held at both its 13- and 50-day today, a good sign. Also, various technical indicators are improving, and stochastics still has room to run. However, it doesn't take a master technician to see the near-term prospects for MACD divergence, as well as for H&S.

Mark Hulbert published an article on Wednesday that discusses how the NYSE High-Low Index is on the cusp of signaling a bottom. This is a favorite bottom finder of mine, and the article mentions how the indicator's creator, Gerald Appel, noticed a very oversold 9% reading on Tuesday. Appel was talking about the blue 10-day on the chart below, and crossing back above 20 is the Buy signal.

The relationship of price to the 50-day offers important insight into the relative strength of four of the main indexes. The NDX, Dow, NASDAQ and SPX are included below, arranged by price strength. It's something to think about when building watchlists.

One chart looking suspicious of the equity rally is the VIX. For such a powerful up day, the VIX slipped just 0.5%. Option-based protection continues to be a prized possession.

The market hasn't been very generous or stable, and great setups in leading stocks are still few and far between. This suggests that equities have more work to do, and it's a worthy time to be patient.

I'm out all day tomorrow, so I'll see you after the close.

best

dk

Tough Love

2007-08-07T20:30:00.000-07:00

In the face of its self-inflicted credit problems, Bernanke gave Wall Street some much-needed tough love on Tuesday.

The FOMC offered a token nod to "tighter credit conditions", before reminding professionals for the bazillionth time that the greater policy issue is still inflation. As difficult as the credit crunch may be for some, it stems from poor choices made by professionals who should have known better. Unlike his predecessor, Bernanke remains intent on letting the marketplace heal such overindulgences on its own, and isn't predisposed to tempting further moral hazard.

The stock market seems to like this new therapy, as the indexes all closed with decent gains on solid volume. The two current leaders -- the Dow and the NDX -- both reclaimed their 50-day. Internals were also much improved, although New Lows continued to smother New Highs, 963-171.

Daddy taking the T-bird away certainly inspired leading stocks. The IBD100 shot up 2%, although internals still came in just good, not great. While 25 stocks saw accumulation vs. just 11 under distribution, two-thirds of stocks on the IBD100 had lower volume than on Monday. Institutions remain cautious about charging back into the good stuff.

The NASDAQ is trying to be on its best behavior, but it's still no candidate for sainthood. The high-volume action off the 200-day is positive, but the Composite is still a damaged chart mired in a thick band of resistance. Overhead supply doesn't thin out for another 70 points, so if stocks move up, expect a bumpy ride.

However, the bigger issue is that in TA, few things are more rare than an untested bottom. Statistically, this pullback won't be over until 2490 gets sat on again, and the best double-bottoms overshoot lower on their retest. History is filled with examples of retests taking weeks -- even months -- to finally develop.

With the FOMC meeting now in the books, two important and related questions are still searching for answers:

1) Is the credit problem going to poison the broader economy?

2) Has the stock market now seen the worst of it?

Debate has a habit of raging on endlessly, but parsing the market for objective, evidence-based data is a better basis for making investment decisions. The two sections below use a few charts to help work through the questions above.

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

Regarding credit issues contaminating the economy, it's worth noting that the short end of the yield curve (3-month/10-year) flipped negative over the past week. While this is an unwelcome development, the 2-year/10-year remains unperturbed. This gives the yield curve "recession" indicator a lukewarm reading at worst. Below are charts of both curves.

While specific mortgage and derivative metrics have imploded over the past two weeks, the Treasury and corporate bond markets have remained more rational.

Below is a chart of the 10-year Treasury bond, along with LQD (an investment grade corporate bond ETF), and HYG (a junk bond ETF). Over the past two weeks, as the Bear Stearns fiasco hit the tape and financials plunged, Treasuries, high-grade paper and junk bonds all moved higher. Things can change, but so far this is not the sign of "credit contagion."

Junk bonds (HYG) are particularly noteworthy. During a week that we learned we're in "the worst fixed income market in 22 years" HYG actually moved higher. There's no doubt that Bear Stearns and other non-banks have issues. However, If the crisis was truly widespread, high-grade paper would be falling and junk would be tumbling out-of-control. Things could get worse, but for now this is no Armageddon, and the broader credit market is still functioning.

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

Regarding the stock market: if all that remains for this pullback is for it to retest the lows, this is one heck of a bull market. The jury is still out, but a couple of interesting developments are worth noting.

The McClellan Oscillator is a breadth metric that smoothes and distills advance-decline data into a single line on a chart (for more info, click here or here). NAMO is a stubborn indicator that is not easily impressed, but in an unusual TA event, it's developed a positive divergence with the NASDAQ over the past two weeks.

Interestingly, Up Volume vs. Down Volume (NAUD) is printing a similar divergence. Both NAMO and NAUD printing positive D raises the odds for higher prices soon, possibly in the form of sharp, strong rally.

With not even the most basic timing indicator printing a Buy yet, it's premature to get ahead of oneself. However, this market is displaying remarkable tenacity against a steady drumbeat of problems.

If this bottom does hold, it's worth acknowledging Bill Luby's thus-far prescient bottom call he made at 11am on Monday. For the record, this is currently the precise market low. Bill also gave fair warning a bottom was near on Sunday in a post on VWSI, his proprietary volatility metric. Nice going, Bill.

This has been an interesting summer, which will no doubt be continued on Wednesday.

See you then.

best

dk

The Dow Follows-through

2007-08-06T20:58:00.000-07:00

Now that Spector has resigned as head of Bear Stearns -- and a scapegoat is safely in place -- we can all get back to buying stocks.

At least that's what the market appeared to be saying on Monday.

In an interesting development, Day 4 of last week's rally attempt saw the Dow print an IBD follow-through day. Despite Friday's selloff, the Dow never undercut last week's low, and that kept the rally attempt alive. On Monday, the Dow surged 2.2% on a 1% uptick in volume and the bull "officially" lives on. Of course, Barry Bonds is about to "officially" break Hank Aaron's record also.

According to the steroid-free research of Bill O'Neil, market rallies are confirmed by a follow-through day on one or more indexes. While it doesn't guarantee success, it shifts pressure back to the bears to maintain control of the pullback. In short, the bulls now have a slight, statistical advantage, but how long it lasts is anyone's guess.

The NDX hasn't cut through last Wednesday's low either, but its 1.9% bounceback came on slightly lower trade (0.6% lower to be exact). Since the market peaked in July, Industrials and Technology are two sectors that have held up well, and their strength was visible again on Monday. Below are both the Dow and the NDX.

One of the problems in identifying the bottom as it occurs is that powerful divergences usually arrive to blur the signal. For example, stocks enjoyed a powerful reversal on Monday, but NASDAQ breadth was still negative. Even worse, New Lows totally spanked New Highs, 1171-102. This is a ratio of 11-to-1, which may be signaling a climax bottom -- or not. This statistic is also consistent with dead cat bounces, and in the context of a bounce day is worthy of caution.

Leading stocks certainly didn't clear anything up. The IBD100 trailed the broader market with a 0.5% gain, and 28 stocks saw distribution, vs. just 21 that saw accumulation. Definitely a mixed picture from the market leadership, although this too is very characteristic of market bottoms. Regardless, you want to see a proxy for stocks with the very best fundamentals to show accumulation if a real bottom is in place.

The chart below shows that the NASDAQ put in a beauty at it's 200-day on a 9% surge in volume. This is an ideal reaction at support, but it's also nothing more than Day 1 of a new rally attempt. It's still a nasty-looking chart with a lot of work to do.

On Monday, new NASDAQ lows spiked higher than even at the 2002 bottom -- and this is definitely odd for an 8.5% pullback. Still, Monday's New Low total just barely squeaked into the top 7 in the past 7 years, so it has room to get much worse.

The Financials saw genuine buying for the first time in two months, and the surge erased 3 1/2 days of weirdness in one, fell swoop. This is a difficult group to have confidence in, as the odds of roaches in the walls are still very high. The Death Cross doesn't help either.

Another group flashing weirdness is energy. Energy stocks and the underlying commodity have been out of sync for three weeks. As XLE pulled back 12%, crude kept climbing another 14%. Today crude fell to its 50-day, while the XLE reversed at its 200-day. This asynchronous volatility is not for the feint of heart.

If the market climbs higher, retests, and this proves to be "the" bottom, the bulls have serious mojo. Based on investor sentiment numbers, they also deserve a great deal more respect than most investors are giving them.

Thus far, the ratio of hissy-fits to price declines is one for the record book. For the "worst fixed income market in 22 years" to produce a sub-10% stock market decline would suggest we're in an unusually powerful bull market with room to run.

Of course, step one is that the bottom has to hold, and with the VIX printing a 22-handle, there are definitely more challenges ahead.

Until then, see you tomorrow.

best

dk

Fake Steve R.I.P.

2007-08-05T20:30:00.000-07:00

The news about Daniel Lyon is a tragedy that I can understand.

But Bob Nardelli?

If the Blackstone IPO wasn't enough to convince the market that private equity had reached a top, Cerberus deciding that Bob Nardelli is the best executive in America to revitalize Chrysler should remove all doubt.

At least Cereberus kicks things off with an eye towards efficiency:

the announcement serves double duty as both press release and punchline.

best

dk

So, How Bad Is It?

2007-08-05T12:56:00.000-07:00

Cramer's rant struck a chord across the blogging community this weekend.

--- Barry expects it to become "required viewing for market historians and technicians alike", and Barry's cultural sensibilities are matched only by his flare for philanthropy. He honored this pop-finance watermark with a commission for a new musical work.

--- Howard Lindzon thinks Cramer should do a movie ("I hear dead home owners"), and makes the interesting observation that perhaps his craziness is genetic.

--- Adam observes that market conditions are at least ugly enough "for a grown pundit to kick and scream and beg in front of a hot woman on TV, and all he wants is a rate cut."

--- Roger brings up the interesting point that if Bernanke lowers rates, he faces the taunt gauntlet of "Cramer-made-me-do-it". I'm sure Bernanke remembers when he let the martini's do the talking with Maria.

--- For author Michael Panzner, Cramer blathering, "we have Armageddon" is like manna from heaven -- and a natch quote for the next edition's book jacket.

--- The gonzo, potty-mouthed (and often hilarious) Broker A is on Lindzon's wavelength and thinks we should "give this man an Oscar".

So, is Cramer on to something?

Fellow CNBC bretheren Larry Kudlow and Ron Insana think so, as do UBS economist Maury Harris and Lou Crandall, economist with ICAP, the world's largest inter-dealer broker. Also, in a sure sign that hell is freezing over, respected blogger Babak agrees with Cramer that the bond market is facing a liquidity crunch that requires action from the FOMC.

The problem with Cramer's plea is its profound myopia: the broader conditions required for FOMC action simply aren't in place. Said another way, from a data-dependent, Fed policy perspective, the damage remains contained -- for now anyway.

Cynics have another way of putting it: it isn't in the scope of Fed policy to keep the stock market heading higher.

The very thoughtful David Merkel at The Aleph Blog points out that the epic crisis Cramer alludes to doesn't ring true. The problem is "in the exotic stuff" -- subprime ABS and ABS derivatives, CDO's, LBO debt, loans-in-progress, and LCDX/CMBX derivatives. Merkel adds that for "the vanilla structured securities, the market is functioning." Bear Stearns is freaking out because they're heavily-exposed in these areas. Wall Street as a whole isn't -- at least for now.

Also, the ever-rational Dr. Brett points out that this continues to look like a bull market correction and not the beginning of a new bear market (my thoughts exactly). While some sectors are clearly being shredded, others are holding their value. "This is not a monolithic bear market".

If you want to handicap a rate cut, track the clue that the Fed has so carefully included in every FOMC statement in recent memory: resource utilization. If unemployment starts climbing, the FOMC will alter its stance. Short of that -- with the stock market not even in a correction yet and the global economy expanding -- the Fed will stay put and its stance will remain fundamentally unchanged.

The irony is that Cramer's Howard Beale imitation may actually backfire on him. This is now the most widely-anticipated FOMC statement in at least a year, partially due to Cramer's diatribe.

If the FOMC statement isn't sympathetic enough, the market could see a fresh round of selling.

best

dk

We have Armageddon!

2007-08-03T20:30:00.000-07:00

As I watched Cramer's meltdown on Friday afternoon, it wasn't just how poised Erin Burnett remained. Rather, I wondered what Cramer is going to do when the market actually gets bad.

Even after Friday's tumble, the NASDAQ has fallen less than it did in February, and that was just a 7.9% love tap. Stocks aren't even in a correction yet, and television personalities are already channeling Howard Beale. Booyah!

There's never just one roach either.

Just like Bear Stearns won't be the only casualty of the structured credit fiasco, John Mackey isn't the only corporate insider anonymously posting on stock message boards.

On Thursday, Law.com broke a story that Nancy Hughes -- wife of Rambus CEO Harold Hughes -- has been flame posting on the RMBS board at InvestorVillage.com.

Friday morning, I spoke with Ralph "Blue" Kidd, founder of InvestorVillage.com, and he said that Nancy had been posting there since July 2006 under the alias clarissamehitable. "clarissa, me hit-able". Hmmm, sounds fetishy, but alas I digress.*

Last year, the FTC ruled RMBS had acted improperly with regard to its patents. Also, the company had stock option backdating "irregularities". For 10 months, mistress "clarissa" bullwhipped her husband's critics on the RMBS board and accused them of slander. She also implied that former RMBS general counsel John Danforth was responsible for some of the RMBS litigation problems.

I read through Nancy Hughes' posts, and she was SUCH an insider tell it was pathetic. Here's the complete list of all 170 posts (FYI -- Mackey's are much more interesting). Better yet, Treowth posted some interesting highlights.

The InvestorVillage.com RMBS board is an unusually informed and knowledgeable forum, and by Jan 2007, numerous regulars (dotbot, EMPIRICUM, and many others) had become suspicious that "clarissa" was a company insider. Rambus also had begun their own investigation. The Rambus board of directors ultimately cleared Harold Hughes of any wrongdoing and determined he had no knowledge of his wife's postings. Apparently, Hughes had put his wife on Ignore (just kidding).

Food for thought: never post anything on a blog or message board that you don't want to see reprinted in The Wall Street Journal.

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

It was clear from the beginning that Wednesday was not the perfect bottom. Not only was the dip shallow, numerous bottom indicators were far from triggering Buys.

Friday confirmed this assessment, and the NASDAQ closed at a new, 5-month low. While the Composite saw an ugly outside day, the SPX, NYSE and WLSH each sliced through their 200-day. This was not a good development, and the NASDAQ is likely to follow its peers lower.

Unfortunately, leading stocks are giving no clues that a bottom is near either. On Friday, the IBD100 tumbled 3% as just 13 of 100 stocks closed higher. The selling was heavy also, as 42 stocks saw distribution.

The Composite is in bad shape, and it's going to get worse before it gets better.

The weekly SPX shows an index headed into no-man's land. After 5 years, a proper correction of 10% or more appears to be underway.

After all of the drama this week -- Bear Stearns, AHM, the Beazer "bankruptcy", weak factory and jobs data, etc. -- the SPX slid just 1.8%. It's also only 7.8% below an all-time high. A lot of pain lays ahead for investors on the wrong side of this move, and the chart below includes a couple of famous landmarks. 1400 and 1320 are key levels, and both should produce buying interest. Whether either becomes the low of this correction is impossible to tell at this point.

Financials and Energy had terrible weeks, and they were the worst performing sectors. The market is also showing signs it's hunkering down for bad weather. Healthcare, Consumer Non-cyclical and Utilities were the only three sectors in the black for the week.

It's still early to be searching for value in Financials and Energy. These charts have more work to do.

One problem for stocks is that the traditional bottom finders are nowhere close to historical Buy signals. Below are fresh looks at four that were mentioned last week.

Despite the recent surge of New Lows, the High-Low Indexes for both exchanges remain above cycle lows. Historically, meaningful bottoms occur only after the blue 10-day falls below 40 -- and lower is even better.

The percentage of NASDAQ stocks above their 50- and 200-day still have a ways to go as well.

NASI breadth is near a 5-year trendline, and given the NASI lag, this upsloping trendline has little hope of stopping the descent. Breaking the trendline is an early sign that this pullback may prove more serious than any during the past 5 years. This is consistent with other indications that the current slide will be the first 10%+ correction since 2002.

The TOF Ratio is another indicator suggesting more downside will be necessary before a bottom is in. A move down to 1400 would be an early sign that an end to the pullback is near. However, it can bounce around for weeks at those levels before stock prices are ready to rally again.

Stocks have begun a fresh leg down. Following the ball works in both directions -- as does momentum trading -- and patience is required with both to maximize returns. No need to get in a hurry working against the trend.

I hope everyone has a great weekend and enjoys a little R&R. Next week will be another wild one.

best

dk

* Hughes spells the name incorrectly, but Archy and Mehitabel were cartoon creations of New York newspaper columnist, Don Marquis. Introduced in 1916 in The Evening Sun, Archy is a cockroach with the soul of a poet, and Mehitabel is an alley cat with a celebrated past. In reading some of "Archy's" poetry, I discovered that Mehitabel had been Cleopatra in another life, "the favorite wife of the emperor valerian." Perhaps a poor speller, Hughes deserves high marks for metaphor.

Yoyo Market

2007-08-02T20:30:00.000-07:00

Another late-day buying spree clinched a positive close, but Thursday remained a tepid day for stocks overall.

If the action had a familiar yoyo twang, it's partly because the NASDAQ changed directions nine times again for moves of 10 points or more. In the past 13 hours of trading, the Composite has now seesawed 18 times in moves greater than 0.4%. This is why the market feels so choppy, and shows the difference of opinion currently gripping Wall Street.

Once again, leading stocks mirrored this indecision. Stocks on the IBD100 under accumulation or distribution were evenly matched at 14 each (on Tuesday, it was 25 each). The most troubling part was that while the IBD100 climbed 0.7% -- less than the NASDAQ -- 72 of 100 stocks saw volume lower than the day before. Institutions aren't buying the fundamental leadership, and this isn't what you want to see in a market trying to put in a bottom.

The chart below shows that NASDAQ volume faded 14% as price climbed 0.9%. This is as good a time as any to mention that true, v-shaped bottoms are rare. Maybe not tomorrow or the next day, but the odds favor a buying hiatus eventually, with prices falling back near the low. Then, if the bulls are right, institutions will pile in and a follow-through day will be born. If this doesn't happen, it's likely that structured credit has produced several more bodies...or worse.

Most ST technical indicators point to more gains ahead, but the path to those gains could be very unpredictable. Season your exposure to taste.

Since earnings and economic data have generally been good, the market's obvious vulnerability stems from an unknown amount of fetid credit risk, amplified through the yen-based carry trade. Credit malignancies show up unannounced. However, you can keep tabs on the carry trade risk by comparing XJY with SPX.

This first chart below shows that in the years before the carry trade craze hit, XJY (red) and SPX (blue) moved in rough parallel. Important features were different, but the overall direction between them was similar.

However in 2005, the yen and the SPX began moving in inversion, and the carry trade hit stride. A weak yen partially helped fuel the SPX's rise, and an excess was born.

This third chart below is the current 6-month version. As you can see, the recent troubles for US stocks began in June. It's no coincidence that as the yen rallied 4.3% in five weeks, the SPX shed 5% -- a fairly tight relationship.

If you want an edge regarding US stock market direction, track XJY.

One of the bigger problems with this pullback has been market breadth. Even though the NASDAQ dip has been light, breadth has plummeted. This has likely been due to the fact that large-cap strength has held the Composite in place, while the vast majority of stocks have tumbled.

It's hard for the market to move higher with poor breadth, so below are two different ways to keep tabs on this key metric.

NASI breadth is the most famous, but it lags horribly and rarely has anything good to say about breadth (just kidding). Note that it shows a much deeper drop now than during the February pullback. It's also showing zero signs of life.

Meanwhile, the EMA-smoothed NAAD offers much more timely signals, and reflects a significant bounce back in the past two weeks. I keep an eye on both, and they sit at the top of my list of live charts of the market internals..

Very intelligent, seasoned professionals insist that the credit contagion threat is an urban legend. Meanwhile, equally intelligent, seasoned professionals view the credit threat as a once-in-a-generation risk to the financial markets. While these are serious issues, from a dramatic perspective, you can't write this stuff any better.

Since there's no way to know for certain who's right, parse the market for clues. Right now, equities are very jumpy, and the ST advantage is still with the bears. However, those EOD rallies are a change of pace. Be ready to seize the moment, but count to 10 a few times before pulling the trigger.

The jobs data will no doubt contribute to Friday's action. See you then.

best

dk

Heavy Volatility

2007-08-01T20:30:00.000-07:00

A late-day surge offered a dramatic end to a wild trading day.

On Wednesday, an oscillating NASDAQ saw nine direction changes of 10 points or more. At 2.9 billion shares, the Composite also saw the second heaviest trading day of 2007, and the first was just four sessions ago.

The fear of "credit plague" is nearing fever pitch, and five weeks of accelerating volume is a testament to the gravitas of the current trading environment. So much for the lazy days of summer.

Wednesday's positive close also gives it the distinction of being Day 1 of a new rally attempt. It's too early to tell if it's "the bottom", but the stock market's closing sprint on heavy trade is guaranteed to fuel some lively debate.

According to the research of Bill O'Neill, it's a moot point without a follow-through day. This is a big up day on huge volume, four to ten days from Wednesday (in this case, Tue, Aug 7 - Wed, Aug 22). Every bull market in history has begun with one of these, but there's a critical caveat. Even if a follow-through day happens, it alone doesn't guarantee a successful rally. Success requires a steady diet of follow-through days, and the more the merrier.

The chatter is that Wednesday's closing rally was driven by computer trading. It's impossible to know for sure, but leading stocks would concur. Few stocks on the IBD100 are index components, and are thus rarely a part of automated trading capers. As a result, the IBD100 enjoyed little of the closing flourish, gaining just 0.1% as only 45 of 100 stocks closed higher. Also, distribution spread to 28 stocks, while accumulation fell to 15. This was not typical, bullish behavior for a market putting in an important bottom.

The rising volume in the chart below shows that, whatever happens, the outcome is going to mean something. The NASDAQ is also back in a price band it spent 8 weeks churning through. On the daily level, stochastics haven't been this oversold since July 2006, but the weekly still has a ways to go.

If NASDAQ 2515 holds, it would mark the bottom of a scant, 7.6% pullback. The chart below shows that not only is this less than the Feb slide, it would be the shallowest pullback for the NASDAQ since the Oct 2002 bottom. It would also mean that the sprawling credit fiasco proved less systemic than many had feared.

Shallow pullback or not, the VIX has left tall wicks the last two times the SPX tagged the 200-day. The first time produced great results, though the Put/Call was at a greater extreme in March.

Wall Street is very jumpy these days, and there's a palpable sense that more bad news is expected from the structured credit markets. This creates uncertainty, and nothing is worse for the financial markets.

With such a waifish pullback, the bulls have a lot of work over the next few weeks to convince buyers to return en masse to this market. New Lows crushing New Highs, 874-97 is a sobering reminder that stocks remain in a downtrend. Without a string of heavy buying, the negative bias will resume control and push prices to a new low.

Have a great day tomorrow.

best

dk

A Toothy Bite

2007-07-31T20:30:00.000-07:00

We're gonna need a bigger boat.

On Tuesday, a yawning, 62-point outside day engulfed two days of NASDAQ action and part of a third. Volume surged 18% as the Composite led the blue chips 1.4% lower, closing at session lows. Unfortunately, this suggests more downside ahead.

Curiously, internals were bad but hardly catastrophic (see charts). However, New Lows did smother New Highs yet again, 657-132.

In a similar twist, the IBD100 didn't see a selloff as much as a street fight. The index closed down just 0.8%, while stocks that saw Accumulation and Distribution were evenly matched at 25 each. This is unusual, conflicted behavior during a broad market selloff.

The NASDAQ 200-day is just 2.2% lower, and tagging up there would mark an 8.7% pullback. This is light by NASDAQ standards. The RUT is already below its 200-day, the MID is there now, and the SPX, NYSE and WLSH are each less than 1% away. Buyers usually defend these levels, but a third Bear Stearns fund meltdown -- as well as structured credit and currency fiascos -- is unlikely to inspire much confidence on Wednesday.

Below is a 17-month NASDAQ chart that includes the May 2006 correction. As you can see, the current pullback is lightweight by comparison and is even less than the Feb slide. If the 200-day fails, important support lays near the 50% Fibonacci retrace -- a.k.a. the 2007 lows -- about 7.6% lower.

One of the more troubling developments for stocks on Tuesday were hard selloffs in AAPL, AMZN, IBM and ORCL. All have been leadership stocks for months, and tech is on an upswing. It's a bad sign when stocks with solid earnings within a leading sector are hit by heavy selling on the same day.

The VIX is offering little comfort, and continues to be a disturbing chart for equities. After a 5-month, 160% rally in the face of rising stocks, the VIX is once more poised to hit new highs. There's ample fear, but so far there's been little panic. The VIX is up 60% in two weeks, while the SPX is down just 6.4%.

What is the market so afraid of?

Options expert and CNBC contributor Jim Kingsland makes a strong case that carry trade woes intertwined with US credit pathologies is the invisible chupacabra the market fears. If Jim is right -- and this area is his strong suit -- the worst days are still ahead for the stock market.

Over the past two days, I've noticed a surprising number of analysts say, "financials are starting to look interesting here." Oh, really? After today, XLF is down just 13% from its high, a 50-day Death Cross looms, and there's no evidence that the coast is clear for financial stocks. Be late to this party. You'll have a much better time.

The market continues to offer few signs that it's near a bottom, even as tricky storm clouds seem to be gathering. Be patient.

And keep an eye on the VIX.

Wednesday is going to be interesting, to say the least.

best

dk

A Well-Timed Bounce

2007-07-30T20:30:00.000-07:00

Investors bought the dip on Monday, with a few even shrugging off last week's selloff as merely "a flesh wound".

This could prove true of course, but it would be rare to see Monday's 14% decrease in volume mark an important bottom. In fact, Charles Kirk put together a list of stocks appearing on his Stock Screen Machine that bounced at their 50-day over the past 3 days. Of these 19 stocks, just 10 did so on heavy volume.

The IBD100 produced even skimpier results. On Monday, the index outpaced the market with an impressive 2.2% romp as 85 of 100 stocks posted gains. But volume was suspiciously thin for such a move. Just 20 stocks printed accumulation, while a sluggish 74 stocks saw volume lower than on Friday. This isn't the action you want to see after a big selloff, and it's a sign that institutional investors are cautious.

Investors skewered the NASDAQ perfectly on the 61.8% Fibonacci retracement on Monday. However, the Composite is dangling in mid-air between the 50- and 200-day, hardly a place known for its stability.

Most pedigree bottoms start with a giant up day -- at least 1.5% -- on massive volume (FYI -- Investor's Business Daily is calling Monday Day 1 of a new rally attempt). Then, four to ten days later, this is confirmed with a similar, big volume follow-through day. Without these two steps, the failure rate for bounces is very high. In fact, no bull market in US stock market history has ever begun without a follow-through day. This is why there's so little need to be hasty.

MACD is now negative, while Monday's action was technically an inside day. This means that the short-term downtrend is still intact, but tomorrow is another day -- and the odds for more upside are high.

For the first time in five months, the 5-10-20 Timer flipped to a Sell on Friday. This is an IT indicator -- not a short-term one --and of all of the mainstream timers, it has one of the more reliable track records.

By now, most investors have discovered the cruel truth that ProShares inverse ETF's don't move in precise, mirror inversion to their indexes. However, Monday offered an unusually bitter demonstration. While the RUT bounced just 0.8%, TWM tumbled (oops) -3.5%! That's 4.4X strength -- in the wrong direction.

Regardless, even with Monday's anomaly, TWM has been very generous to investors. While the RUT is off 8.4% from its July high, TWM has vaulted 19.8%! That's an advantageous 2.35X performance.

A few months back, Shanghai was an obsession for US investors. What a difference a few months makes. On Monday, Shanghai notched its second all-time high in the past three sessions, and no one noticed. Obviously, this time it's different.

It's impossible to generalize, but many investors have fallen into one of two camps. The first believes that the bull market is still intact, and that stocks will soon recover to new highs. From a pure data standpoint -- economic and market-based -- this view has a lot going for it.

The other view holds that the market's most destructive threat lies just off camera. The proof of this is less tangible and more future-weighted, but the indirect signs are unmistakable: a soaring VIX, epic New Lows, options shenanigans and a record selloff.

The truth is that -- as of now -- we really don't know which one is correct. When someone says they do know, you may be learning as much about that person as you are about the market. The data is clear, but the outcome isn't. This is what corrections are for -- to help shake out the truth.

Should be a lively day of trading tomorrow, and unfortunately I'll be in a long meeting for most of it.

See everyone after the close.

best

dk

Bottom Quest

2007-07-28T18:43:00.000-07:00

The worst thing about last week is that the there are so few signs that a bottom is near.

Both the mainstream press and the blogosphere offer some excellent reading this weekend. There's also large amounts of windbag speculation and a fair amount of bellyaching. While this all makes for titillating journalism, an evidence-based approach to the market tends to be more productive for your portfolio.

As investors ponder a sea of red, below are five sets of market-based observations:

1. Panic

All rumors to the contrary, there was no evidence of panic selling this week. Even though the Dow shed 585 points in its worst week since 2003, trading was orderly, and from an historical perspective, the declines were chump change. This correction might accelerate into panic, but it hasn't happened yet.

On the left below is a chart of this week's NASDAQ. On the right is the Composite during the LTCM scandal in the summer of 1998. From the July high in 1998, the NASDAQ tumbled 33% in 12 weeks. In the last two weeks, the NASDAQ skidded a sickening 23% (imagine the Dow falling 3100 points in eight days).That felt panicky, especially because --doh! -- everyone thought the bottom had occured four weeks earlier (red arrow).

2. Bottoms

I received numerous e-mails, comments and questions this week about identifying bottoms. Of particular interest was whether the IBD100 offered an edge. The short answer is no, the IBD100 is essentially useless at calling bottoms. Most leading stocks are bloody stumps at market lows. Most recover; many don't.

However, other indicators are helpful. When these are used in combination, they're generally accurate (but look again at the red arrow on the 1998 NASDAQ chart just above).

While some are crying oversold! this weekend (and the odds for a ST bounce next week are actually pretty good), almost all of the popular "bottom finders" show a market still above a Queen-approved bottom. Below are three classic proximity alerts. There are others, but those aren't there yet either.

Despite the HUGE surge in New Lows this week, the blue 10-week on both the NYSE and COMPQ High-Low Indexes remains well above important bottoms. Below are 5-year charts of the High-Low Indexes, which include the Oct 2002 bottom as reference. Historically, the blue 10-week line crosses below 40 -- and even below 30 -- before a meaningful bottom is in.

The percentage of NASDAQ stocks trading above their 50- and 200-day is still high for a bottom. NYSE versions of this metric produce similar results.

NASDAQ market breadth as measured even by the unforgiving NASI is still above the rising trendline off the Oct 2002 bottom. NYSI offers a similar take.

3. Crash Alert?

Regular readers know that I'm hardly an alarmist, but -- believe it or not -- important market evidence emerged this week that raises the chance for a 1998-type stock market crash. First of all, we're not there yet and the odds are still long. [Re-read the previous sentence]. However, as I was preparing notes on this, I read Adam at Daily Options Report quoting Jason Goepfert on the same thing.

NYSE New Lows spiked to severe levels this week. In fact, New Lows have been this high only four times in the past 10 years. Making matters weirder, the NYSE is just 7.1% below an all-time high.

Also, the Dow wasn't the only chart that set a 4-year record this week. The VIX surged an ear-popping 43% to a new 4-year high, even though the SPX fell a relatively meager 4.9%. In fact, the SPX is up 6.9% from the March low, but instead of falling, the VIX has skyrocketed 160%!

The VIX is now parked 36% above its 10-day, a very unstable spread for the VIX. This week, option traders priced in something ferocious -- and still unseen. Given the New Low spike and a 24-handle VIX, my observations mirror Goepfert's about what stock market history says are three plausible scenarios:

--- the worst is over, and it's time to go long for the mother-of-all short covering rallies

--- this isn't just a correction, but the 4 1/2-year bull market is done and we're grinding lower into a lengthy bear market

--- the market detects something bad on the horizon, and we're about to see a rapid, convulsive selloff

The odds of a crash are long, but the market itself has thrown these scenarios onto the table, and not just the guys at Safehaven. Below is a 10-year chart of NYSE New Lows, along with the VIX.

4. Decent Economics

Juxtaposed against the doom and gloom is that the underlying US economics are surprisingly good. GDP is recovering, earnings are solid, valuations are nominal, employment is high, inflation is stable, and yields are low. If the market does plunge wildly lower, the economics point to it being a superb buying opportunity.

It's worth noting that, as subprime contagion and a rising yen threatens the US economy, the 2-year/10-year yield spread detects nary a whiff of recession. In fact, it's printing a 3 1/2-year low.

5. The Penalty Box

Below are the six worst performing groups this week. Housing is no surprise, but it's noteworthy that the metals continue to offer no refuge despite a dollar perched at the abyss. The next two losers -- energy and cyclicals -- are the most troubling economically. Utilities took out the 50- and 200-day in five sessions, and small caps lived up to their reputation as the style to avoid.

Pullbacks separate the wheat from the chaff, and one useful feature of this correction is that it started during earnings season. Companies that beat estimates are holding up better than the broader market, and the fresh earnings data is useful in preparing high-quality watchlists. No single investing strategy works for everyone, but stocks that pull back the least are typically the ones first out of the gate when the selling stops. Historically, they also run the farthest.

The week's best performers? Biotech, down 1.8%, followed by the NDX, down 3.9%.

Also, it's useful to track which stocks closed higher on a week like this. It's a great set of stocks with which to start a new watchlist.

--- On the NDX, 13 stocks closed higher on the week: AAPL, AMAT, AMLN, AMZN, BIIB, BMET, CELG, CHKP, GRMN, GENZ, ISRG, TLAB, VRTX, WYNN.

--- On the OEX, 6 stocks closed higher on the week : CL, IBM, MRK, PEP, PG, T

--- On the MID, 23 stocks closed higher on the week: ADVS, AJG, BEC, BRL, BRO, BSG, CCMP, CVD, DCI, EXBD, FFIV, GGG, GPRO, MFE, PAS, PLT, RFMD, ROL, RSG, VARI, WOOF, WPO

It should be a lively week ahead, as investors learn how good they are at following the ball in the other direction.

Hope everyone's having a great weekend.

best

dk

IBD100 Strikes Again

2007-07-26T17:50:00.000-07:00

The value of monitoring leading stocks was revealed in spades on Thursday.

Stocks with the very best fundamentals function like an early warning system for the stock market. Until they sell off in heavy volume, a rally almost always keeps moving higher. As a proxy for this leadership group, I've used the IBD100 since May 2003.

On Tuesday, the NASDAQ fell -1.9%, but the IBD100 went into a freefall. The index tumbled -3.7%, 96 of 100 stocks closed lower, and 54 stocks saw heavy selling. This was highly unusual behavior, and a sign to raise cash.

On Wednesday, the broader market recovered, but the IBD100 kept falling. The selling stayed heavy, and by Wednesday's close, 69 different stocks had seen distribution on one or both days. The IBD100 was now off -4.4% in just 13 hours, and the number of stocks trading below their 20-day had tripled to 62. This was not a good sign.

On Thursday, the meltdown finally spread to the broader market, and stocks had their worst day in five months. NASDAQ volume ballooned 38%, and a stunning 87% of all stocks closed lower. Internals were a mess (see charts), and New Lows flattened New Highs a jaw-dropping 1119 to 105 -- a ratio greater than 10-to-1.

Making matters worse, the IBD100 continued falling hard. The index shed another -3.5% -- nearly twice the NASDAQ's slide -- and 93 of 100 stocks closed lower. 60 stocks printed distribution -- a three-day high -- and stocks below their 20-day increased to 78 -- up from 21 just three days earlier.

After such a big selloff, is it time to buy?

Traders profit mightily from this type of action. Also, Adam at Daily Options Report notes a Dr. Brett discussion of improved odds after extremes of new lows. However, it's important to recognize that the market itself is showing no signs that it's reached a bottom. In fact, all of the indexes have ruptured and confirmed below their 50-day, and the RUT is below it's 200-day. This market has a lot of work to do, and it's going to take some time.

Consider as well that the SPX is down just -4.7% from its high, and the NASDAQ fell farther on Tuesday than it did today. Soon the market will bounce, but the odds favor more downside ahead. The economic environment is offering little stability, so it's time to be patient.

Bargain hunting and short-covering drove stocks well up off their lows, but the NASDAQ remains a messy piece of business. Swim at your own risk.

The best thing about selloffs is that they show the market's true colors. What doesn't fall is a big clue about the market's next move. Of the ten market sectors, Thursday's best performer comes as no surprise: Technology.

As a slaughter ensued, the Tech Ratio surged to a 3 1/2-year high.

Not only was the NASDAQ the day's best performer, QQQQ bounced off its 50-day to close down just 0.9%. Tech will see more selling, but it's essential to note what institutional investors are buying during a bloodbath.

The most troubling chart on Thursday was arguably the Cyclical Index. If investors are bailing on the cyclicals during a global expansion, serious weakness is afoot.

If you believe the cyclicals are headed lower, then an inverse ETF play is the Basic Materials inverse, SMN (it's thinly traded -- at least until today). Also, if you think large cap will outperform small, subprime woes haven't peaked and real estate hasn't bottomed, then consider TWM, SKF and SRS. Below are all four, and they will likely prove better performers than QID.

Finally, a flight to puts produced a Sell signal for the TOF Ratio.

The biggest take-away is to not get in a rush on the long side. As the Financials fell through their 50-day five sessions ago, a number of pundits said they were "nibbling" on bank stocks. Well, that was 5% ago.

On a lighter note, the gag about Boone Pickens marrying Becky Quick has taken on a life of its own. The story was picked up by Dealbreaker.com, who ran it by the Fashionistas with very catty results. It's become Jane Wells vs. Becky Quick, which suits me just fine - lol.

See everyone tomorrow.

best

dk

The Four Horsemen

2007-07-25T18:18:00.000-07:00

Cramer's Four Horsemen (not pictured) have now all reported Q2 earnings -- and only one spent any time in jail.

While GOOG sits with an ankle bracelet, AAPL, AMZN and RIMM are on a tear. Like RIMM and AMZN, AAPL reported a monster quarter on Wednesday, and shares closed up 9% AH. Technology is leading again, and sellers will have trouble keeping this market down.

The housing data was terrible on Wednesday -- and leading stocks slumped again -- yet the bears still couldn't deliver the killshot. Once more, the NASDAQ reversed an ugly selloff to close higher. This was no cheap, inside day either, as volume was heavy. In fact, not only was it 1% greater than on Tuesday's selloff, it was the fourth heaviest NASDAQ trading day in 2007.

It's not like the market got any help from leading stocks either. As the indexes rose, the IBD100 fell another -0.7%. Just 37 of 100 stocks closed higher, and institutional sellers didn't back off either. A disturbing 40 stocks saw selling pressure greater than Tuesday's dumpfest. Internally, the IBD100 weakened further, as stocks beneath their 20-day swelled from 42 to 61.

In the past two days, the IBD100 has tumbled -4.4% while the overall market internals have deteriorated (see charts). Meanwhile, the market has barely budged: the NASDAQ is off just -1.6%, the NDX -1.2% and the Dow a scant -1.1%. Now, the market appears ready to move higher again. What's going on here?

On Tuesday evening, the NASDAQ announced that its short ratio had increased to 4.5 days in July. This is 9.3 billion shares sprinkled across 3,274 stocks, and that's on top of the stomach-churning 8.4 days of volume held short on the NYSE. Pre-sales are good for Deathly Hallows, but pre-selling a stock market correction is a terrible idea. An epic short ratio has put a floor under the market, and it shows.

The NASDAQ remains in an uptrend, just 2.8% below a new 6 1/2-year high. Leading stocks or not, this is a strong chart, especially if it resumes climbing without even touching the 50-day.

The Tech Index caught itself at the Bollinger midpoint and makes a compelling case for a reversal doji. While the NASDAQ is up 13.9% off the March low, the Tech Index has rallied 17.9%. The Bollinger bands suggest tech stocks can run for a while.

Another promising sign for the market are the Biotechs. After printing a new all-time high in April, the BTK pulled back 9.2% over the next three months. The BTK is now making a great case for a double-bottom, and the market always does better when the riskiest groups show strength.

Just before 11am on Wednesday -- as stocks were in a power dive -- VIX maven Bill Luby posted a seven-word entry:

VIX at 19.46. Time to buy equities.

As if some magic rune had been spoken, stocks immediately reversed to close higher, while the VIX reversed to close lower. This action bodes well for higher stock prices on Thursday...but Bill, you're scaring me.

Another guy who scares me is TOF, who was very unimpressed with Tuesday's selloff ("Too damn obvious if you ask me"). The TOF Ratio agrees, and a flight to calls leaves stocks prepped to fight another day. Nice call, TOF.

If you look around, Wednesday's action left countless potential reversal dojis. The MID, RUT, Transports, Utilities, Cyclicals, Tech Index, SOX, and even the forlorn Housing and REIT Indexes are all showing a market that arrested its decline and stabilized.

It's highly unorthodox for a market to climb without the Financials. For it to climb without the Financials AND the fundamental leadership is even more unusual. But this market eats "unusual" for breakfast, and AAPL, BIDU, SYMC and QCOM are catering on Thursday.

See you then.

best

dk

Leadership Freefall

2007-07-24T17:52:00.001-07:00

For the first time in 14 months, the market is flashing genuine signs that it wants to correct.

As the SPX, NYSE, MID, SML and WLSH all took out 50-day support on huge trade Tuesday, leading stocks went into a freefall. In fact, this marked the single worst day for the IBD100 since Feb 28. Even worse, the internal metrics haven't been this bad since May 2006.

On Tuesday, the IBD100 tumbled a stunning -3.7% as 96 of 100 stocks closed lower. A decisive 52 stocks printed distribution days vs. just 3 stocks that saw accumulation. The selling was so widespread that 62 of 100 stocks shed -3% or more.

It's time to raise cash.

42 IBD100 stocks now trade below their 20-day -- a number that doubled on Tuesday. Neither the February Shanghai selloff or the June subprime meltdown produced this type of reaction from the market leadership.

This weakness is something new, and nearly always signals a shift in trend. It will take downside follow-through to confirm the signal, but the odds now favor the bears taking control. How long and how far they can carry the ball is unknown at this point.

The NASDAQ fell -1.9% on the second-highest volume since the February selloff. Still, the Composite, NDX and Dow are all in better shape than the rest of the market, and all three trade above their 50-day. If sellers take out the NASDAQ 50-day at 2620, the first Fibonacci support is 2575, then 2528.

To size things up, bottoming at the 200-day would be an 8.8% pullback. A 15% correction returns the NASDAQ to just below the Fib 0% line on the chart below.

As the bears will attest, this has been an unusually stubborn market, one that has not fallen easily. As a result, even though the NASDAQ closed just 3.2% below a record high, New Lows have already spiked to levels associated with key IT bottoms. This type of spike so close to a record high deserves attention going forward.

The chart below goes back to Oct 2002. As you can see, similar spikes marked bottoms, not tops. Welcome to the road less traveled.

Though Financials got the headlines on Tuesday, Utilities were actually the worst performing sector on the SPX. On a day that saw both 10-year Treasury yields and energy fall, Utilities acted very strange and took a -3.5% shellacking.

It's hard to know for sure, but on Tuesday North Carolina lawmakers passed a measure requiring NC electric utilities to use more renewable resources and energy efficient programs. Meanwhile, the Illinois electric utility Ameron began a $1 billion give-back program at the urging of IL lawmakers.

Utilities pay nice dividends and are often viewed as a safe haven in times like these. However, they've been under selling pressure since early May, and were surprise losers again on Tuesday.

While everyone loves their QID, technology stocks may prove unwilling participants as a pullback develops. As the charts below show, the odds favor SKF and SRS producing far better results. If you want to short an index with a ProShares inverse ETF, consider TWM. All four are included below.

Finally, what a difference a day makes on the option floor. The TOF Ratio took a sharp hit on Tuesday. Not a crossover yet, but almost.

It's rare to see the IBD100 take a beating like on Tuesday without the broader market shifting gears. Institutional investors are taking profits on the canaries, and it's a sign worth heeding. That said, the bears still need downside follow-through to make this pullback really stick.

Financials, Utilities and now Energy stocks are big reasons that the blue chips are suffering. However, the NASDAQ is still in an uptrend. With tech stocks rising, it's likely to require extra effort to push the Composite lower.

Also, like the spike in New Lows, the massive short interest is an unusual variable here as well. A NYSE short ratio of 8.4 days to cover suggests that pullbacks could be interrupted by fat bursts of short-covering. An 18-handle VIX is certainly giving this type of volatility a thumbs-up.

The bears haven't organized an advantage like this in a long time, and it's clearly their opportunity to lose.

Until tomorrow, have a great evening.

best

dk

What Do You See?

2007-07-23T20:44:00.001-07:00

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

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

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

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

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

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

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

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

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

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

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

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

Until tomorrow, have a great evening.

best

dk

Timing Indicators

2007-07-22T20:45:00.000-07:00

Investing is so complex that one-decision timing indicators have a natural appeal. There's a near-limitless smorgasbord from which to choose, including a huge number of paid systems (like those seen on late-night infomercials).

However, every technical indicator -- MACD, stochastics, Williams%, ADX, etc. -- is a condition metric of some type, and can be easily pressed into service as a timing indicator free of charge.

This post examines nine, non-proprietary indicators, and includes live links for each (bookmark this page and keep up with their progress). It's a completely arbitrary list, so please share any favorites that aren't included here.

Do they work? Critical caveats aside, timing indicators can be effective if used correctly. However, the caveats are very important, and below are five of the biggest:

1. There is no such thing as a perfect timing indicator. Period.
2. All timing systems have statistically significant margins for error.
3. To improve their efficacy, timing systems should be used in combination with other metrics.
4. Even the best timing indicators give false signals.
5. One of the biggest problems is lag: the signal may be correct, but it happens either early or late.

Bottom Line #1: There are no genuine shortcuts to being a good investor. No timing system in the world can compensate for poor stock selection.

Bottom Line #2: The very best timing systems are good at avoiding drawdowns. However, the vast majority underperform the indexes over time.

For the record, as of Sunday, July 22, eight of the nine indicators listed below are on a Buy.

best

dk

The indicators below are in grouped in five types: Moving Average, Options, Volatility, RSI and CCI.

Moving Average Systems

1. 5-10-20 Live Link

This is perhaps the granddaddy of all market timing systems. It uses EMA (20), (10) and (5), and has above-average effectiveness. A Buy is triggered when both EMA(5) and (10) cross above (20). A Sell is triggered when both EMA (5) and (10) cross below (20). Note that the current chart has been on a Buy since March, and wasn't shaken out during the May-Jun consolidation. For novices, 5-10-20 is a good place to start.

2. Beisiegal Live Link

Dan Beisiegel of Illuminant Capital developed a system that uses two EMA pairs. A Buy is triggered by EMA (11) crossing above EMA (47). A Sell is triggered by EMA(21) crossing below EMA (55). Beisiegel cites great backtesting results, but in practice both Buy and Sell signals have a huge lag.

Option-based Systems

3. TOF Ratio Live Link

Long-time message board regular The Old Fool, aka TOF (Richard McRanie), was the first person I observed using this indicator. The TOF Ratio divides the NASDAQ by the CPC, and Buy and Sell signals are triggered by EMA (21) crossovers above and below EMA (50). Historically, the first negative crossover is a warning shot; the second negative crossover triggers the Sell. This is a clever indicator with a long history of accurate market signals.

4. CPCE Ratio Live Link

The put/call ratio was developed by Marty Zweig in the early 1970's. In recent years, Zweig has questioned the usefulness of the CPC as a contrarian indicator due to distortions in index option activity from hedging activities. Zweig now favors the CPCE in these types of calculations, a sentiment widely shared by the technical community.

5. BPI Ratio Live Link

Message board regular hari_seldon at Clearstation is the first person I noticed divide the Bullish Percentage Index by the CPCE. The BPI's are breadth metrics that track the percentage of stocks printing bullish Point & Figure charts. Seldon uses the raw ratio data for his triggers, and this data can be noisy, triggering false signals at both ends of the range.

Filtering the noise with moving averages and watching for crossovers produces useful signals. The chart below uses the NDX BPI, and EMA (21) crossovers above and below EMA (50) serve as the Buy/Sell triggers. Like the TOF Ratio, the first negative crossover is a warning shot; the second negative crossover triggers the Sell.

Volatility Systems

6. MarketSci.com VIX Timing System Live Link

Bill Luby posted about the MarketSci.com VIX Timing System, which is in itself based on a Credit-Suisse VIX study. The MarketSci sounds (and looks) complicated, but in practice it's quite simple. Backtesting reveals that it's also very reliable, but it has a tendency to keep investors out of profitable trades.

Buy the S&P 500 when:
---- (a) the 11-day SPX EMA (red) is below the 11-day SPX SMA
AND
---- (b) the 11-day VIX EMA (purple) is above the 11-day VIX SMA.
---- Exit the position when either of the two conditions above are not met.

7. VXN Timer Live Link

My preferred volatility timer simply divides an index (NASDAQ, SPX, INDU, RUT) by its volatility metric (VXN, VIX, VXD, RVX, respectively). Smooth the data with EMA's, and watch for EMA(21) crossovers above and below EMA(50). Below is the NASDAQ:VXN.

RSI

8. RSI Live Link

The Relative Strength Index (RSI) was developed by J. Welles Wilder in the 1970's, and like moving averages, you can't talk about timing systems without mentioning RSI.

Trading Markets has a good RSI timer overview, and both Bill Rempel and David at The Shark Report are dedicated practitioners of the most common version, RSI (2). There are countless variations, but in its simplest form: Buy when RSI(2) falls below 10; Sell when RSI(2) rises above 90. Note on the chart below that this "strict" version would have kept you out of many profitable trades.

CCI

9. Nocona Live Link

iHub regulars are familiar with Nocona's Early Retirement System. Nocona is based on CCI(100), and there are many variants. In it's original form, a Buy is triggered by a move above CCI +100; a Sell (short) is triggered by a move back below CCI +100. Once short, you hold short until CCI breaks back above -100, at which time you cover and go long.

Bush Dick Update

2007-07-21T10:40:00.000-07:00

Five polyps (not pictured) were removed from George Bush's colon on Saturday morning. None "appeared worrisome". Bush reclaimed the powers of the Presidency from Dick Cheney at 9:21am.

Cheney set 25th Amendment records during his brief 2-hour Presidency. In just 125 minutes, the former Vice-president vetoed 73 pieces of legislation, appointed 91 Federal judges and officially renamed the Secret Service, "the SS".

best

dk

25th Amendment Fractal

2007-07-20T22:32:00.000-07:00

In a bizarre, fractal-like metaphor for Friday's OE ream job, George Bush is having a colonoscopy on Saturday, while Dick Cheney serves as acting President of the United States.

It's unusual to use dick, bush and colon in the opening sentence of a post without it (a) being a prank, or (b) violating Terms of Service. That said, my feelings about the market are a metaphor of how I feel about Mr. Bush's medical procedure:

It's okay for selloffs to hurt a little, but I really don't want complications to develop.

For now, heavy selling on Friday did hurt a bit, and it capped off a rocky week for stocks. The NASDAQ managed to bounce off the lows on Friday and close above its 13-day, but the action marked the 2nd distribution day in three sessions. In a continuing pattern, blue chips faired worse, while the NDX did better.

The outperformance by the NDX was noteworthy considering the ballast provided by GOOG, ERIC, ADSK, XLNX and GILD. It's a sign of strength that on a weak OE Friday, just 18 of 100 NDX stocks closed down 2% or more. Tech stocks are experiencing broad strength, and the NDX is a big beneficiary of this shift.

Despite earnings misses, subprime woes, inflation chatter, dollar dumping, peptic financials, $75 oil and OE, the stock market itself still isn't giving off the stench of a looming correction. Maybe next week, but for now the NASDAQ uptrend remains intact.

For example, not only are the indexes all within 2% of record highs, leading stocks continue to show fortitude. The IBD100 had an off-week, but it certainly was no train wreck. This week the IBD100 slid -1.9% -- less than the RUT -- while an impressive 35 stocks tagged new weekly highs. In a clear sign of consolidation, just 25 stocks saw heavy selling, while 15 saw buying and a whopping 60 stocks closed on volume lower than last week. Until the fundamental elite take a nosedive, institutional investors will continue to have a taste for stocks.

Short-term, the most problematic technical development is a bearish price megaphone. MACD, Stochastics and ADX all suggest that the bears are at the plate once again. They have a terrible batting average, but next week is a new inning. While downdrafts always deserve the benefit of the doubt, the bears have a lot of work ahead to inflict course-altering damage to the NASDAQ.

The Tech Ratio confirmed above 3-year resistance this week, triggering a secular buy signal for technology stocks. This is the clearest evidence yet that a change in trend is afoot. It's worth noting that even with misses from GOOG, INTC and MSFT, the Tech Ratio didn't flinch. This shows the depth and efficacy of the signal.

Another sign complementing the Tech Ratio is that -- after 8 years -- Growth is finally outperforming Value, and Large-Cap is outperforming Small-Cap. Below are 3-year ratio charts of Style and Capitalization. When the chart on the left is climbing, Growth is outperforming Value. When the chart on the right is climbing, Large-Cap is outperforming Small-Cap.

Both charts show that important bottoms have been formed, and that key resistance has recently been breached. When these charts are climbing in tandem, Large-Cap Growth is under accumulation, another positive for tech stocks.

Price strength is the simplest and most revealing metric of tech mojo. While the broader market slipped, 6 of the 8 tech subindexes closed higher this week. Below are the Tech Index, Networking, Hardware and Semis. Software and Disk Drives also closed higher.

One place not to be long are the Financials. Even as XLF confirmed below its 200-day, a handful of analysts mentioned "nibbling" here. Oy.

There's a famous Wall Street expression: what's the difference between being early and being wrong? There isn't any. Some famous shorting systems say that now is when the easy money is made on the short side. Before going long, make sure you're certain that a bottom is in. This isn't a market that's favoring value right now.

The market has produced very nice gains in 2007, but the grapes have suffered on the vine to get there. Volatility continues to edge higher toward 10-year averages, which means that the weather isn't going to get much better either. The falling dollar favors metals, and you should consider tech while making sure that your focus includes large-cap growth stocks.

In addition to a slew of earnings, next week sees home sales, the Beige Book, unemployment and preliminary Q2 GDP. Lots of pin action potential.

Until then, have a great weekend.

best

dk

Tough Day Ahead?

2007-07-19T20:50:00.000-07:00

I'm on a busy schedule this evening -- and gone all day tomorrow -- so unfortunately this is a short post tonight.....dk

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

Thursday was a good day for stocks, but earnings shortfalls by cap-weight titans GOOG and MSFT won't make it easy for the bulls on Friday.

Volume was strong all day Thursday, but trade was still down a bit from Wednesday's total. This isn't optimal behavior for a market tagging record highs, especially on a day that saw the SPX finally take out its all-time closing high.

However, despite earnest pleas (and warnings) from pros and amateurs alike, the market itself continues to offer few concrete signs that it's ready to pack it up and go home. Pullback, yes; Correction, no.

The IBD100 is a proxy for the market's fundamental elite, and after two weeks of huge gains, it's taking a breather this week. That said, there's no sign of the ripping distribution and massive price collapse this index flashes at market tops. On Thursday, the IBD100 matched the NASDAQ's 0.8% gain as new highs jumped from just six on Wednesday, to 20 on Thursday. Also, 26 stocks saw accumulation vs. just nine seeing distribution.

Echoing the IBD100's behavior, Charles Kirk at The Kirk Report made an interesting observation today. Charles assembles his best investment ideas from a set of remarkable, custom stock screens he's developed over the years. Charles has been tepid on the market for some time, but would be happy to warm up if his best ideas were actually doing better. For example, he put together a list of 19 earnings plays this past weekend, and so far, 10 are up, and 9 are down. These are excellent picks, and this 10-to-9 performance about sums up the best-of-breed this week.

The Dow went from 13,000 to 14,000 in less than half the time it took to cross the previous 1,000 points. Even with this acceleration, the NASDAQ is actually the year's leading index with a 12.6% gain. The market is in a potent uptrend, and it's going to take a fresh and powerful plot twist to truly reverse its course. As we all know, there is certainly no shortage of potential catalysts.

The one constant in 90% of all OE Fridays is epic volume, starting with a giant spike at the open. If this action holds true, Friday will either be just the 2nd distribution day in a month, or the 13th up day in the past 16 sessions. Either way, the bulls have had it much, much worse.

Have a productive day tomorrow, and I'll see you over the weekend.

best

dk

Pickens in China

2007-07-19T09:20:00.001-07:00

As has been widely reported, Boone Pickens is currently on a 10-day China junket, accompanied by talented CNBC Squawk Box co-anchor Becky Quick.

Pickens, a billionaire and arguably the most colorful US oil tycoon, is apparently also quite a lady's man. In a dk Report exclusive, it's been learned that Pickens and Quick have exchanged vows in a small, private ceremony in Beijing.

The CNBC co-anchor will go by her new name, Becky Quick-Pickens.

In this exclusive honeymoon photo, Boone sets a few ground rules.

It's also been learned that part of Boone's trade mission is to interest the Chinese in a new passenger jet of his own design. The 64-passenger aircraft is being built by Boeing, and takes a page from the Hummer playbook: it's OK to trade fuel economy for other, more muscular features.

best

GE has designed a new engine specifically for the Pickens jet. In addition to standard jet fuel, it runs on raw crude oil, diesel, natural gas, heating oil or gasoline (it does not run on ethanol). The only parties more excited than the Chinese are Venezuela and Iran. Both countries are said to have arranged attractive financing for the jet's purchase.

Dodging Bullets

2007-07-18T20:56:00.000-07:00

While Bear Stearns showed everyone the pitfalls of feeding off of garbage, stocks skirted a bloodbath that had seemed almost inevitable.

In very bullish action, the NASDAQ overcame heavy selling on Wednesday to bounce at its 13-day and close down just -0.5%. Blue chips did better, but it was the tech-laden NDX that led the market with a scant, -0.19% slip.

Market internals were terrible all day, which made the bear's inability to hold prices lower very conspicuous. Water defied gravity and flowed uphill on Wednesday, and sellers have no one to blame but themselves.

Volume started off unusually heavy but slowed as the day wore on. Heavily-traded Wednesdays have been a recurring pattern during OE week, and the July expiration appears to have been no exception. Other than January, every OE week in 2007 has closed higher, and this week would make it six straight.

The IBD100 laid low and consolidated, essentially avoiding Wednesday's hijinx. Like the NASDAQ, the IBD100 fell, bounced back and closed down -0.5%. However, volume was mellow. Just 12 stocks saw accumulation and 17 printed distribution, leaving 71 of 100 to consolidate on volume lower than the day before. Stocks with the very best fundamentals attract steady hands, and these pros were unperturbed by Wednesday's broader drama.

The stock market is in a strong uptrend, especially the Dow and NASDAQ. Despite the steady drumbeat of economic woes, stocks continue to show remarkable tenacity. There are few things more bullish than a stock market that ignores bad news.

When the NASDAQ is in rally mode, it skips off the 13-day until it's time for a rest. Currently, the Composite hasn't closed below the 13-day since confirming at the 50-day -- fourteen sessions ago. The odds favor the market continuing its climb higher.

Once more, Technology, Transports, Materials, Industrials and Energy all closed within 1% of new highs. This makes for a tough case that the stock market is on the verge of falling apart. All but Technology are included below.

Two months of consolidation prior to Friday's big breakout has taken the stuffing out of the market internals. They're not in tragic shape, but they've definitely seen better days. There's also a good explanation for the weakness.

Wednesday saw a strong spike in new NASDAQ lows. A closer look reveals that over half of these new lows were financial stocks, and another 13% were consumer- and housing-related. This also translates to poor breadth and up/down volume stats as well. It's important to keep a close eye on the internals (see charts), but in conditions like this, stocks can still move higher when the internals are less than ideal.

On Wednesday, the VIX closed with a 16-handle, even as the stock market sits just below new highs. Of the many descriptions that can be levied against equities, complacency isn't one of them.

While Rupert Murdoch threw another Bancroft on the barbie, Barney Frank and Co. tried cooking Ben Bernanke with hot air. Bernanke proved largely heat resistant, though he did take a scorching on credit risks, M3, the schizophrenic dollar policy and even the use of obtuse Fed speak. Political "bloviating" took hold when "income inequality" took the floor. Most importantly, Bernanke stuck to his guns on inflation.

The lively week continues Thursday with more earnings, economic data and FOMC minutes. Meanwhile, stocks look like they want to move higher.

Until then, have a great evening.

best

dk

Leaders Lag

2007-07-17T20:40:00.000-07:00

As the NASDAQ and Dow tagged record highs, Tuesday's action had a strange twist: call it the Day of the Underdog.

On the surface, stocks were strong, especially technology. Also, Cyclicals and Transports tagged new highs for the second straight day. However, a closer looked reveals that beaten up Financial stocks surged as leading stocks lagged all day.

As the Dow flirted with 14,000, the IBD100 slipped 0.4%. The IBD100 didn't flash any warning signs, as its losses were light and internals were very balanced. 20 stocks made new highs, 18 stocks saw accumulation, and 23 stocks saw distribution. Yet, this was the first day in recent memory that the IBD100 persistently lagged the broader market in such a distinctive way.

When you add the INTC earnings reaction to the IBD100 wobble, the market looks primed for a pullback. However, it's important to keep a little perspective. Stocks are in a serious uptrend, and it's going to take more than IBD100 profit-taking and INTC volatility to bring it down. Today, Michael Ashbaugh layed out the TA case very clearly that the US markets have staged a technically valid breakout. Also, hidden in plain sight is that INTC guided higher, and the reality of that is eventually going to sink in.

Over the next few days, it may feel like the world's coming to an end. But a lot needs to happen before the NASDAQ signals that it's ready to give up its 50-day (about 5% lower).

Looming pullbacks aside, the NASDAQ remains a great-looking chart tonight, and it's in a position to endure some selling pressure before trend-changing damage sets in. In a confirmation of MACD, ADX trend strength is the sharpest it's been in over 10 weeks, and MFI is very solid.

Without question, the most powerful group on Tuesday were the semiconductors. The SOX action was much more than just wishful thinking about INTC earnings as well. Not only did the SOX close at an 18-month high, a whopping 7 of the 18 component stocks closed at record highs! The strength has been going on for a while too, as every SOX component except for MOT is above its 50-day.

SOX strength is not an isolated technology incident either. On Tuesday, the Tech Ratio closed at a 3-year high to finally trigger a secular buy signal.

This signal was first described in April, then discussed again three weeks ago in Time for Tech? UPDATE. Long story short, after a 7-year drought, technology stocks have been outperforming the broader NASDAQ since July 2006. Today they broke above critical resistance, and a secular shift back to technology leadership is underway.

Another key indicator in the bull's camp is the TOF Ratio. Option traders have continued to show an appetite for calls. Like the NASDAQ, the Ratio is in the position of enduring some chop before triggering danger signs.

Investment horizon and risk tolerance are the two biggest features in determining how each investor handles volatility. In periods of uncertainty during strong uptrends, I rarely unravel positions unless there's heavy distribution, but that's just me.

Not only will OE keep investors on their toes, there's oodles of economic data and earnings news still ahead this week. Wednesday sees inflation and manufacturing data, plus we get to watch Barney Frank try and convince Ben Bernanke to lower interest rates. By all accounts, Frank has really sharpened his rainbow for this one, so it should be an interesting discussion.

Until then, have a great evening.

best

dk

Jane Wells Blogs The dk Report

2007-07-17T10:44:00.000-07:00

CNBC reporter Jane Wells has been blogging recently about Nigerian 419 scams (she's on the beat pursuing one - lol). I shared the unusual 419 letter I had received, as well as the gag post The dk Report Considers Calling It Quits and its responses.

This morning she mentioned The dk Report in her CNBC blog, Funny Business. It's at the bottom of the page of this post.

Thanks, Jane!

best

dk

Quiet Consolidation

2007-07-16T17:43:00.000-07:00

The market kicked off a busy week by lazily digesting last week's gains on quiet trade.

NASDAQ volume actually ticked 4% higher, but Monday's fractional loss and below-average trade avoids qualifying the action as a distribution day.

Leading stocks concur, as the IBD100 slipped just 0.6%, while stocks under accumulation and distribution were evenly matched at 17 each. Even on a down day, the IBD100 saw an impressive 37 new highs. This is a clue that, for now anyway, this market isn't finished moving higher.

You'd get no argument from the Dow. Industrials are on a tear, and Tuesday's strong Empire number kept the heat on the Dow. Not only did it close 0.3% higher to a new, all-time record, INDU came within 11 points of tagging 14,000. Round numbers tend to have psychological importance, but 14k isn't a particularly important technical level.

The NASDAQ is just barely within its Bollinger bands and is still perched a feisty 1.4% above its 13-day. It's common in this situation for institutions to sit on their hands and let stocks slide back into the net. INTC and YHOO both report AH on Tuesday, which is as good a reason as any for more consolidation.

However, Tuesday's PPI and factory numbers -- as well as OE -- are wild cards that could push stocks vigorously in either direction. Data risks aside, the NASDAQ itself continues to offer few reasons for concern.

In another sign of a market not ready to go down, Technology, Cyclicals and Transports all joined the Industrials in ticking up to new highs on Tuesday. This could be a setup for some grand, sell-the-news tumble, but the fact that these influential sectors are hunting in packs is encouraging.

As the week progresses, it's unlikely that the market will remain as dull as it was today.

-- On the data front, we see PPI, CPI, Housing, Unemployment and FOMC Minutes.

-- On the earnings front, we get scads of reports from the financials, as well as the first dose of bellwether tech: INTC, YHOO, EBAY, JNPR, AMD, GOOG, MSFT and SNDK.

Toss in OE, and investors could see some volatile, peppery action over the next four days.

Until then, have a great evening.

best

dk

Topping Off the Tank

2007-07-14T10:53:00.000-07:00

Investors couldn't resist adding a little extra to the pile on Friday.

Obviously, the market doesn't suffer from paraskevidekatriaphobia, as the indexes fearlessly notched a fresh set of new highs. It's worth noting that Friday's buying was met with little resistance, as the additional gains came on a 34% volume slide. The market tried to pause, but couldn't.

NASDAQ breadth was negative, but all of the other internals were strong. New Highs outpaced New Lows 569-167, a number almost identical to Thursday's total. This is a relatively high number of new lows for a market hitting historic highs. However, a closer look reveals that 40% of these lows were financial- and consumer-related. Right or wrong, the market continues to send the message that the subprime fiasco will remain contained.

Leading stocks echoed this view as they continued their climb. The IBD100 added another 0.7% while an impressive 36 stocks tagged new all-time highs. As the NASDAQ added a solid 4% over the past two weeks, the IBD100 has accelerated 7.7%! The market leadership is very healthy, and is telegraphing further highs for the stock market.

Nonetheless, investors continue to be wary. The Market-Needs-A-Pullback crowd has stepped it up a notch this weekend, despite the Dow's best day since 2003. How high does the market need to go before the skeptics turn bullish? According to fresh contrarian data, quite a bit higher.

Mark Hulbert is out with a new article that notes investment newsletter editors remain cautious, even after Thursday's breakout. The HSNSI stands this weekend at 40.6%. In contrast, before the Shanghai selloff in late February, the HSNSI stood at 62.4%, even though the Dow was 1,100 points lower.

It's not normal for the Dow to climb 1,100 points while investors grow more bearish. Markets need excessive optimism to put in a top, and there's simply too much pessimism for the market to quit moving higher. For example, if you believe, "This market is crap", it's unlikely that you're 100% long. Statistically, markets only stop once everyone is in. Regardless of what "targets" have been reached and what various "systems" are saying, the market itself is providing no evidence that we're near a top.

The NASDAQ is printing a remarkably strong daily chart this weekend. Money Flow crossing above 50 is particularly encouraging, as is ADX climbing after its first sub-10 visit in 18 months. There are few things more bullish than every index making new highs on the same day.

The NASDAQ weekly chart has proven itself to be a reliable compass of market direction. As the waffling daily chart gave conflicted signals for months, the weekly Composite filtered the noise and held a bullish bias. This week investors learned the weekly chart had it right all along.

The NASDAQ has posted gains in 12 of the 19 weeks since the March bottom. It also suggests that more gains are coming soon..

The evergreen appeal of the bearish position is its underlying sense of wisdom. It's hard not to sound prudent when spelling out market risk in the name of preserving capital. In contrast, the bullish position tends to sound reckless, greedy and even naive.

Each day, in addition to the mainstream press, I read through about 80 financial blogs (thank you Bloglines). The collective sense of these writers isn't happiness at the market's prosperity. There's a pronounced sense of concern -- and a touch of helplessness -- as if we're stuck in a car with a drunk behind the wheel.

It's interesting that liquidity, momentum, the Fed and greed/stupidity/ignorance are the favored reasons given for the market's rise. The disconnect is that this is never what really makes markets go up. Earnings do. Regardless of how much "liquidity" is out there, once companies put up lousy numbers en masse and guide lower, markets drop like rocks. The 34% rise in the NASDAQ since July 2006 hasn't been fueled by Fed repos and retail momo, but rather by three straight quarters of upside earnings surprises.

The six charts below show that there's about to be a fourth. Simultaneous record highs in Technology, Industrials, Materials, Energy, Transports and Cyclicals are evidence that there's more going on here than the PPT.

It's also a clue that the record NYSE short interest is in for the Summer From Hell.

I receive a large number of questions and comments best summarized as how much further can the market go? Most readers know that I don't set targets, ranges, limits, stops, etc. I have no edge in that game, and have never been able to consistently profit from these time-honored techniques (it's very unfashionable, but I simply buy really excellent companies and hold them until massive distribution triggers a sell).

Nonetheless, target fans should note that the NASDAQ confirmed above its 38% Fibonacci retracement on Thursday. After a 78% correction, this is a very big deal, and it's taken 5 years to get to this point. In a nutshell, TA suggests that the NASDAQ could run to about 3100+ before seeing a significant correction. That's roughly 15% above Friday's close. Few investors expect such an absurdity, which is of course this signal's biggest asset.

The titanium armor protecting the bears is that eventually they will be right. The bull market will end very badly with untold suffering, and Ursa Major will once more point to true north. There is little evidence to suggest that day is near, but this is as good a time as any to mention Deus ex machina.

The term describes the famous convention from Greco-Roman tragedy in which a new and totally unexpected plot twist appears at the end to abruptly alter the end of the story. In today's market context, Al-Qaeda could strike, we could bomb Iran, the credit debacle could reveal a Trojan Horse, there could be a natural disaster, etc.

It's tough to plan for Deus ex machina. As long as it's a no-show, the market itself is pointing to higher stock prices.

I hope everyone is having a great weekend. I'm off to pick up family from the airport, and we're looking forward to a fun several weeks.

best

dk

Bad News Bears

2007-07-12T20:26:00.000-07:00

Perhaps the only one who had a day worse than the bears was fellow message board poster John Mackey (not pictured).

Stocks gapped and ran on strong volume Thursday, and the NASDAQ, NYSE, SPX, NDX and WLSH all posted record closes. The Dow did as well, actually printing its best day in four years.

On the eve of Harry Potter blowing into town, investors were also treated to the magic alchemy of TA. In just 6 1/2 hours, bearish triple tops shape-shifted into bullish flying W's. The bearish case suffered its most serious setback in months, and thankfully few bears are convinced.

The behavior of leading stocks over the past many months made today's action impressive, but not surprising. If you recall, last week -- as the pros vacationed -- the IBD100 vaulted a blistering 5.2% in just four days. Record short interest, frequent distribution days, high volatility, shaky market breadth and negative sentiment are historically no match for the benefits of monitoring stocks with the very best fundamentals.

As the stock market soared today, volume was actually mediocre for most of the session. This was a sign that rattled shorts played a key role in moving prices higher. The beauty of short covering rallies at new highs is that institutional investors don't have to commit huge sums of capital to see their portfolios swell. They just keep spending enough to feed the beast.

Of course, there was more to Thursday's action than seller's remorse, as market internals were outstanding (see charts). Breadth was strong, 85 of every 100 shares traded was a buy, and New Highs outpaced New Lows 577-162. The IBD100 added 2% as 82 of 100 stocks posted gains, 38 hit new highs and a whopping 47 printed accumulation days. Investor appetite for themarket leadership remains strong.

Pullbacks aside, none of this is the behavior of a market that has seen a top yet. Equities are telegraphing that Q2 earnings will be solid, especially in industrials, materials, technology and energy. Select healthcare, transports and a few other areas should do well also.

The NASDAQ was a good-looking chart last night, and it's even better tonight. The Composite has jumped outside its Bollinger bands, suggesting a near-term pullback is likely. However, secondary indicators all point to more gains ahead, implying that dips will continue to be bought.

There are many excellent charts tonight (see industrials and materials) but one with arguably the most far-reaching implications for investors is the Tech Ratio. While the NASDAQ and NDX had superb days -- and INTC, CSCO, GLW, AMAT, HPQ, SNDK and others went ballistic -- DJUSTC (aka the Tech Index) soared a remarkable 2.4%.

This pure-play index of 205 component stocks touches every subsector and market cap. After a 7-year technology drought, today's performance drove the Tech Ratio to the edge of a 3-year high and a secular Buy signal. The NASDAQ is returning to a leadership role, and this has enormous implications for the stock market.

The horror of the dotcom collapse seven years ago appears to have altered investor psyche. Even though the NASDAQ is up 700 points and 34% just since last July, very few investors are actually enjoying this market. In fact, many are more suspicious than ever -- even bearish -- although both exchanges sit at record highs.

A number of important market events have occurred over the past 5 months that suggest the current rally still has a ways to go. I've posted about these before, but a review of key highlights may be helpful at this juncture.

All markets sell off and this one will too. However, unless something changes dramatically, the evidence suggests that near-term selloffs will be short-lived, and this rally could go on longer than many investors suspect.

Until tomorrow, have a great evening.

best

dk

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

Bull Market Review

Feb 27 - Mar 3 -- A 9% Shanghai plunge takes the US markets down 7% in a week. Bearish investor sentiment skyrockets overnight, the VIX doubles in three days, and fear swells by every metric. Most feel the bull market is over, and recession fears are at fever pitch.

Mar 15 -- 11 days after Shanghai, a huge intraday reversal at the 200-day surprises amateurs and pros alike. The IT bottom is in.

Mar 21 -- Marty Zweig's famous Nine-to-One Up Day. A rare event, Up Volume outpaces Down Volume by a ratio of 9-to-1. Every bull market in history has started with one of these.

Mar 22-24 -- A 5-10-20 Buy signal is triggered on each of the major indexes. After four months, it is currently still in place.

Mar 24 -- The 2-year/10-year yield curve inversion heals.

Apr 4 -- The TOF Ratio triggers Buy signal.

Apr 10 -- NYSE returns to new all-time high.

Apr 16 -- The Day of Global Highs: Brazil, Mexico, Australia, China, South Korea, France, Germany and England, along with the SPX, NYSE, RUT, MID and WLSH, all hit record highs.

Apr 18 -- The Dow returns to new all-time high.

Apr 19 -- US markets unfazed by second Shanghai selloff. Surprisingly strong Q1 earnings are primary investor focus.

Apr 20 -- Dow Theory confirms bull market as Dow, Transports and Utilities simultaneously close at all-time highs. Last Dow Theory confirmation was in 1998.

Apr 22 -- NASDAQ, NDX and SML return to new 6-year highs.

Apr 24 -- The SOX hits new 52-week high.

Apr 25 -- Dow hits 13,000 and New Highs outpace New Lows an astonishing 602-69. Another Dow Theory confirmation -- the second in 5 days.

May 5 -- Copper is up a whopping 60% off the Feb low.

May 15 -- The 3-month/10-year yield curve inversions heals.

May 30 -- US Markets ignore third Shanghai selloff.

May 31 -- "Sell in May" never happens. The NASDAQ closes month at new 6-year high.

June 1 -- SPX hits new all-time high.

June 7 -- Bear Sterns hedge fund woes surface. Bonds sell off, NASDAQ tumbles 45 points and VIX jumps 22%. Fears of market correction are widespread.

June 13 -- 10-year Treasury yield hits 5.31%, highest level in 13 months.

June 15 -- NYSE short interest level hits 3+% of all shares outstanding, highest level since 1931.

June 16 -- NASDAQ unexpectedly hits new 6-year high.

June 21 -- Tech Ratio hits new 18-month high.

June 23 -- NASDAQ prints its 10th distribution day in 7 weeks.

June 29 -- Last week of June sees heaviest QID volume ever.

July 6 -- IBD100 gains 5.2% to post its best week in 13 months.

July 12 -- US Markets gap and run to new highs. Dow has biggest point day in 4 years.

MacGyver!

2007-07-11T20:34:00.000-07:00

The Plunge Protection Team isn't rescuing this market -- it's being saved by Angus MacGyver*.

With little more than a Swiss army knife and duct tape, investors escaped yet another tricky jam on Wednesday. The action was all the more impressive since this particular "jam" is potentially the biggest derivatives meltdown since Long-Term Capital Management.

Just one day after Moody's downgraded 399 mortgage-backed securities and S&P mulls $14 billion more, the stock market unexpectedly bounced back. How the bears failed to muster follow-through is anybody's guess, but apparently it's going to take some really bad news to take this market down.

In an impressive combo move, the NASDAQ closed the July 2 gap, bounced off its 13-day, rallied into the close and printed the strongest up volume since bottoming off the 50-day ten sessions ago.

Wednesday's action wasn't some fluky, short-covering rally either. Market internals were solid and leading stocks stayed strong all day. The IBD100 added 0.6%, with 67 stocks closing higher, 20 making new highs and 23 stocks seeing accumulation. Leading stocks continue to present little evidence that a top is in.

Of course, the market's death-defying behavior has nothing to do with the PPT or MacGyver. Wall Street is diabolically selfish, caring for nothing except earnings. Derivatives scandal or not, the market continues to telegraph another decent earnings season. Financials, housing and consumer stocks won't participate of course, but technology, materials, industrials and energy are all poised to do some heavy lifting between now and mid-August.

Tonight the NASDAQ is printing a very nice-looking chart. Since Wednesday's volume was actually higher than either of the two 50-day bounces (green arrows), Wednesday counts as follow-through and flips the second arrow green. Technically, the Composite could endure more selling and still be OK.

These days, when it comes to market volatility, no possibility can be fully ruled out. So take it with a grain of salt that the VIX is printing a H&S variant tonight. The chart below shows that the VIX has a history of forming three peaks before settling into a period of fresh lows. The durations for these "triple tops" vary, but the resulting VIX fade has generally been good for stocks. That said, remember that the VIX has been on a rampage of late, so don't get your hopes up.

The TOF Ratio continues to look quite rehabilitated. Not only is it in near-perfect position, the red 50-day EMA is at a 4 1/2-month high.

MacGyver jokes aside, the current mortgage-related problems have extremely serious implications for Wall Street. If the situation is as bad as many believe, important public companies will buckle under the weight of their own stupidity, and the collateral damage will be extensive and unpredictable.

However, many companies will survive this trial largely unscathed. By avoiding financial, housing and consumer stocks, investors can measurably improve their odds of success. Monitoring price and volume action is the other market prophylactic. Now more than ever, avoid securities experiencing high-volume selling.

Tomorrow we see if DNA and the Alcan courtship can produce any pin action. Until then, have a great evening.

best

dk

*The MacGyver bit was poached from a recent post by the one and only Jim Kingsland. Thanks, Jim.

Inflation Takes a Back Seat

2007-07-10T20:30:00.000-07:00

On Tuesday, a relaxed Ben Bernanke shared the latest, cutting-edge thinking on inflation, but jittery investors had other things on their minds.

Like selling.

The NASDAQ gave back almost four days of gains in 6 1/2 hours on Tuesday, and a whopping 20% pickup in volume showed that the sellers meant business.

Everything from uninspiring earnings to retail warnings were blamed for the tumble. However, the action in financials and bond yields was a tell that numbskull lending practices were the real reason for the carnage.

This wasn't a day to own stocks with "Bancorp", "Group" or "Holdings" in the name. Debt is being marked down on a massive scale, and dumb moves by smart people are finally receiving the credit they deserve. As vast wealth is destroyed before our eyes, remember that ginormous opportunity is being created at the same time.

The pros leave clues to these opportunities every day. While Tuesday's selling touched every sector, stocks outside of the financial, housing and consumer areas held up OK. In a familiar pattern, technology was a standout. While the SPX tumbled 1.4%, the NDX shed just 0.9%, and the pure-play Tech Index slipped just 0.7%.

Leading stocks showed no special selling urgency either. The IBD100 fell 1.7% -- less than the RUT -- and while 87 of 100 stocks closed lower, just 19 stocks printed distribution days. If leading stocks are any indication, profit-taking -- not panic -- drove the broader market lower on Tuesday. Institutional investors remain convinced that stocks with the very best fundamentals will continue to produce earnings, even in this environment.

While the financially-laden blue chips are a portrait of misery tonight, the NASDAQ is technically in much better shape. The NDX is even more so. The Composite has closed below the trendline exactly once in four months, but the real danger lies below the 50-day. Based on current market behavior, the bears have a lot of work to do before that boundary is crossed.

While it's very fashionable to turn to QID at moments like this, the strength in technology stocks has actually made QID a poor investment choice.

The chart below compares several popular inverse ETF's since the blue chips peaked on June 1. Unsurprisingly, Real Estate (SRS) and Financials (SKF) are the clear winners, with 18.2% and 12.9% gains respectively. Among the indexes, MZZ -- not QID -- has actually posted the best return.

If you're having problems with QID, there's a reason: QID is the worst performing inverse index ETF of them all, down 3.7% over the past 27 sessions. Think about it: technology is showing leadership, while financials and real estate are falling apart. To get the maximum bang for your buck, consider targeting market weakness with the inverse sector ETF's. Here's a link to the complete ProShares list.

The trademark characteristic of the bond market is stability. However, yield charts show that ever since the Bear Stearns news hit the tape in early June, the credit markets have been anything but stable.

The series of wild, spastic gaps in the chart below is sickening evidence that Wall Street actually has no idea how extensive the subprime problem really is. Opinion is all over the map, and it changes every day. Traditionally, times like these see yields driven lower by a flight to quality. However, in this situation, all bets are off, as the precise location of "quality" is under discussion.

As gut-wrenching as selloffs can be, they also clarify the market's profile. For now, companies generating the strongest sales+earnings are still coveted by institutional investors. This is a very good sign, and until it changes, the market will eventually resume moving higher.

The best generic advice is simply to adjust your risk profile until it feels comfortable to you. Also, this is a risky environment to hold stocks experiencing high-volume selling.

The rest of the week should be filled with surprises, so until tomorrow, have a great evening.

best

dk

Five in a Row

2007-07-09T20:45:00.000-07:00

The NASDAQ printed its fifth straight 6-year high on Monday, despite another day of weak, midsummer volume.

Outwardly, the market is gripped by the widespread anticipation of an imminent correction. However, the performance of leading stocks -- and even the market itself -- suggests that this an unlikely near-term outcome.

Last week, while the NASDAQ rallied 2.4% on low, holiday trade, the IBD100 vaulted 5.2% on heavy accumulation. In fact, this was the biggest weekly gain for the IBD100 in 13 months, a feat made all the more impressive in that it took just four sessions. This record also happened in the face of rising Treasury yields and crude prices, and a 4-week high in bearish sentiment (54%) at lowrisk.com.

On Monday, this pattern of leadership strength continued. The IBD100 tacked on 0.8% as 60 of 100 stocks made gains. This wasn't "melt up" action either, as a beefy 44 stocks hit record highs, and 35 stocks saw accumulation.

While leading stocks have set the pace, stock strength is visible in other key areas of the broader market as well. Monday saw new highs in Materials, Industrials, Technology and Energy. Transports sit just below a new record -- even with $73 oil -- and the downtrodden Consumer index is just 1.2% below an all-time high. Even the SPX and Dow are now less than 1% below new, all-time highs.

Housing collapse or not, markets don't fall apart when leading stocks and cyclicals are under steady accumulation. In fact, with the IBD100 at all-time highs on the eve of earnings season, market naysayers are in the unenviable position of looking to the dreaded expression:

Yes, but this time it's different.

Since bouncing off the 50-day, the NASDAQ has climbed 110 points and posted gains in 7 of the past 8 sessions. MACD has broken out of its downtrend and is at a 5-week high, and ADX is curling up after its first visit below ten in 17 months.

However, volume has been wickedly low for two weeks, and tonight the Composite is printing a respectable bearish hanging man. "Sell-the-earnings-news" profiteering could descend on stocks this week, but unless something new develops, there's little to suggest we're facing The Big One. Pullback, yes. Meltdown, no.

One of the Great Truths of the current 4 1/2-year bull market is that stocks haven't had a 10% correction since bottoming in October 2002. While this is true for blue chips, few point out that the NASDAQ has actually had four corrections since the 2002 bottom.

The weekly chart below shows these four periods. The average length of each correction was a respectable 18 weeks, and the average pullback was 16.4%. While the blue chip ascent has been largely uninterrupted since 2002, the NASDAQ has corrected roughly once a year. As technology stocks continue to strengthen, this history of authentic backfilling plays into the NASDAQ's prospects for longevity.

Option activity suggests that investors are hedging the current record-bursting short interest with calls. As a result, the TOF Ratio is enjoying a positive crossover, a rare occurrence so soon after confirming negative.

The most interesting feature of this chart is the clean, uninterrupted move higher in the Stochastics. There's some real "uh-oh" going on in the option pit. Short-term, the TOF Ratio would benefit from some put buying, but otherwise it's pointing to higher stock prices.

The market is overbought at new highs on thin volume, and the VIX has a 15-handle. Short-term, things could get messy, with a lot of "told you so" downside drama. However, until institutions abandon the fundamental leadership en masse and dump the cyclicals, any gut-wrenching volatility will end with more buying.

I hope everyone had a great weekend, and it's nice to be home.

best

dk

Road Rules

2007-07-05T08:20:00.000-07:00

I serve on the Board of Directors of a not-for-profit, and I'll be out-of-town beginning Thursday for our annual meeting. It's a very busy schedule, and I'm not returning to Los Angeles until late Sunday, July 8.

It's unlikely that I'll be able to post before Monday, so have a great rest of the week, enjoy your weekend and I'll see you Monday!

best

dk

Happy 4th of July!

2007-07-04T11:16:00.000-07:00

As we celebrate our independence, Bill Rempel offers a thoughtful reminder that what we call "patriotism" started out as High Treason. Thanks, Bill.

It's also a great day to have a laugh, and nothing is quite as funny as we are.

From my family to yours, have a great holiday.

best

dk

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

Kickin' it at the beach....

Before there was Michael Moore and insurance companies, all we had were doctors to watch our backs.

Isaiah Washington knows that you never can tell what's going to happen next, so live a little!....

A sobering reminder for iPhone fans...

NutriSystem is for wimps. If you really want to shed a few pounds and keep it off, try sanitized tapeworms. Easy to swallow!

Tricks of the trade...

But be careful trying that at home...

The Group W Bench

2007-07-03T22:39:00.001-07:00

The stock market is spending July 4th on the Group W Bench.

Four weeks of moving from resistance to support has produced W formations on each of the major indexes. While a W is one of the more bullish consolidation patterns, regular bouts of selling have raised doubts. These W's are more like Arlo Guthrie's military rejects, and further selling could see the W's fade into triple tops or bearish descending triangles.

The problem for the bears is that there has been a plot twist. The NASDAQ and NDX have just sprung to new highs, and their flying W's are particularly promising. However, these breakouts occurred on milquetoast holiday volume, and they need confirmation.

Ironically, as the nation celebrates its independence, investors remain indentured to mixed market signals.

Or are they?

Leading stocks and market internals are anything but conflicted. Both are bullish, especially leading stocks. While the market internals look positive (see charts), the fundamental leadership is in a class by itself.

The IBD100 tacked on another 0.5% on Tuesday as 57 of 100 stocks moved higher. On just a half-day of trading, 10 stocks managed accumulation days and a mind-boggling 40 stocks tagged record highs (this follows 41 new highs on Monday). According to this group, the broader market is on the verge of more gains.

Below is a set of 4 charts that show the various W formations. The top row includes the two exchanges, and both are printing the more bullish versions. The SPX -- with its heavy financial weighting -- lags the others. These charts need follow-through, but if you're going to repair a bearish double top, this is exactly how to do it.

If the market is genuinely bullish, a heavy volume follow-through is inevitable and the orange arrow will flip green. MACD had a bullish crossover on Monday and is at trendline resistance, and Tuesday saw just enough juice to move OBV positive. Volume or not, this chart has improved, and consecutive 6-year closing highs is nothing to sneeze at.

The TOF Ratio has taken a bullish turn. After confirming negative, it's unusual for this indicator to heal itself so quickly. However, the inverted H&S on stochastics, the series of higher price lows and the recent EMA crossover all suggest that the TOF Ratio is forming a new Buy signal. Option investors are getting nervous and moving to calls, and the TOF Ratio is reflecting this bullish development

As the NASDAQ and NDX sit at new highs -- and the others climb out of W's just below -- an estimated 12.5 billion shares are held short on the NYSE. It would take 8 days to cover this open interest, and it's a short ratio unmatched since 1931.

The last thing Wall Street expects is for the stock market to move significantly higher from here. However, whether measured by leading stocks, fear levels, short-interest or earnings expectations, the market itself is saying that higher prices are a real possibility.

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

I sit on the board of a not-for-profit, and leave Thursday morning for my annual dose of corporate governance. My schedule each day is 8am - 11pm, so posts before Monday, July 9 are possible, but unlikely.

Unemployment and payroll data should provide significant pin action on Thursday and Friday, and volume will likely be higher as well. It should be an exciting two days, and a few participants may be getting off the Group W Bench - one way or the other.

Until then, have a great 4th of July! I'll check in when I can.

best

dk

Leading Stocks Go Supersonic

2007-07-02T20:04:00.000-07:00

While the NASDAQ closed at a 6-year high on dubious volume, leading stocks put in a blistering performance on Monday.

The IBD100 accelerated past the broader market by a huge margin, soaring a whopping 2.7% as 85 of 100 stocks moved higher. 38 stocks added 3% or more, and three stocks posted double-digit gains.

But the real dazzler wasn't even the 41 stocks that hit record highs. As NASDAQ volume slid 17%, a stunning 41 IBD100 stocks printed accumulation days! Money poured into the market leadership on Monday at levels unseen thus far in 2007.

There is more to this shaky market than meets the eye, and two opposing views appear headed for a showdown.

On one hand, there have been extensive preparations for a market top. Short interest is at record levels, inverse ETF volume is huge, put-call ratios are bearish, volatility is high, options are expensive, double-top warnings abound, housing lays wounded, the dollar is tumbling, hedge funds are teetering, distribution is frequent, technical indicators are weak and professional money managers are near-unanimous in the expectation of a pullback or correction.

Meanwhile, the NASDAQ and NDX closed at 6-year highs, the other indexes are within 1.6% of all-time highs, leading stocks are outperforming, rates are accomodative, liquidity is high, economic data is favorable, cyclicals are strong, multiples have contracted, global economics are expanding, the presidential cycle is here and -- most importantly -- the market is on the eve of an earnings season that could surprise to the upside.

These two sets of market conditions are incompatible. If the market doesn't correct soon -- which it easily could -- investors may experience the mother-of-all-short-covering rallies. As of mid-June, over 3% of all shares outstanding on the NYSE were held short, and similar figures are estimated for the NASDAQ. These are staggering numbers, and are the highest in 70+years.

Given the volume accumulation of leading stocks both today and over the past many weeks, one of the few scenarios that makes sense is that Q2 earnings will be strong. This makes an upside market shock no longer just a remote improbability.

The bears are now in a tricky spot.

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

One day does not a green arrow make. Monday's low volume means that the Amber Alert remains in place despite the 6-year high. The market has been oscillating between support and resistance for two months. Until one or the other is breeched on huge trade, TA insists that there's no hurry to change signals.

Today, Bill Luby noted that Stock Trading Update cited the famous axiom: "Tops aren't built on fear". They're built on enthusiasm, and fear levels point to anything but enthusiasm. In fact, the VIX may be printing only its 5th stock Buy signal in the past two years.

Not only did the NASDAQ and NDX close at record highs, the Cyclical Index closed at an all-time high. The CYC is an important bellwether: if Copper has a Ph.D. in Economics, the Cyclical Index sits on the graduate faculty. Not only does the CYC appear to be printing a fine double-bottom, the chart also suggests that a strong earnings season lays ahead.

Two months of frequent distribution days have inflicted technical damage to the indexes. However, the bears continue to baffle with their inability to take the kill shot.

Four sessions ago, the opportunity was squandered again. Now, on a holiday-shortened week, the bulls have a chance to pull into the lead. Tomorrow is a short day, so the decision will likely be pushed off into the future. But who knows?

Until then, have a great evening.

best

dk

At the Half

2007-07-01T20:18:00.000-07:00

As the band takes the field at the half, this game is a tough call for investors.

For now, both the bears and the bulls continue to hold the line at each test. However, the bears have an overall advantage, and short-term risks clearly remain to the downside.

One of the great disconnects is that the fundamental leadership continues to outperform. While the broader market has dipped slightly since Wednesday's rally, the IBD100 shot up another 1.6% since then to close up 1.2% for the week. On Friday, 55 of 100 IBD100 stocks printed gains, 19 stocks hit new highs and just 8 saw any signs of selling pressure.

Historically, markets don't tumble into corrections when stocks with the best fundamentals are doing well. Of course, markets can still sell off very hard like they did in February and March. However, the leadership fell in-line with the broader market then, and stocks recovered quickly and pressed on to new highs.

However, the market is different now. The subprime fiasco has created much more uncertainty, and that has generated fear. This is why the VIX is up, options are expensive, inverse ETF's are seeing record volume and the NYSE sports the highest level of short interest since 1931. Investors are spooked.

The good news is that being spooked isn't what causes lasting damage to the stock market. Terrible earnings wreck markets, and for now, there are few signs that Q2 profits are set to disappoint. I have often wondered if the scent of Q2 earnings strength is the invisible force driving the IBD100 higher.

Regardless, it's hard to feel good about an index that has seen 11 distribution days in 8 weeks, has falling money flow and negative OBV, yet is still in an uptrend, sits above its 13-day, and is just 1.2% below a 6-year high. If this feels confusing, that's because it is.

It's worth noting that the weekly Composite continues to project a much less confusing (and more bullish) assessment of the NASDAQ longer term. Even though +DI and both CCI's are below 100 and descending. it's not all bad, as Friday marked the 13th straight week that the Composite has closed above its 10-week.

If you're looking for some clarity amidst the confusion, here's a quick summary of 11 things that the market itself is saying:

1. Avoid rate-sensitive stocks. Utilities, Banks, Brokers, REIT's, Mortgage-related, Insurance, etc. are weak and lots of uncertainties surround this group. The market is behaving like the worst is still to come with the mortgage mess.

2. Avoid Housing and Housing-related holdings. Prices haven't fallen enough to stimulate demand and mark a bottom yet.

3. Defensive stocks, such as Consumer Staples, Drugs and Healthcare are currently offering no tactical advantage.

4. Precious metals and mining stocks are not providing much of a safe haven either.

5. Retail is weak. Buy the stuff, not the stock.

6. Energy stocks remain solid. These are prone to unexpected pullbacks, but there's no evidence that the long-term run in energy is over. Good stock-picking in this sector is a plus. Hurricane season awaits.

7. Technology stocks -- once the most radioactive sector in the market -- are under accumulation. Internet, Networking and Telecom are leaders, and Semis are improving. The NDX is slowly establishing a leadership role.

8. Industrial and Materials stocks are generally doing well, especially those with strong international exposure.

9. This isn't a market that's rewarding bottom-feeding. As odd as it sounds, growth is outperforming value, a fact being corroborated by lagging Defensive stocks (see #3 above).

10. There's analyst negativity about foreign stocks, but the stocks themselves continue to show strength.

11. Overall, large cap stocks are outperforming small-cap, but the best individual performers continue to be small-cap.

The market looks like it wants to break down, but the sellers keep running out of gas at support. With all of the divergences and negative mojo, it seems likely the bears will get a few more chances to take it lower. Expect low volume, above-average holiday volatility this week. Also, expect surprises.

I'm on the road Thursday-Sunday, and it's a very busy trip. With the current schedule, once I leave Thursday morning it's unlikely I'll have time to post until Monday.

Hope everyone had a great weekend. See you tomorrow.

best

dk

dk Report Considers Calling it Quits

2007-06-30T09:52:00.000-07:00

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!

2007-06-29T15:52:00.000-07:00

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

2007-06-29T06:49:00.000-07:00

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...

2007-06-28T18:00:00.000-07:00

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

2007-06-27T20:46:00.000-07:00

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

2007-06-26T19:55:00.000-07:00

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

2007-06-26T10:18:00.000-07:00

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

2007-06-25T19:59:00.001-07:00

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

2007-06-23T11:55:00.001-07:00

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

2007-06-21T21:13:00.000-07:00

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

2007-06-21T08:44:00.000-07:00

[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