Where From Here?

Friday's action bore a fractal-like relationship to the entire first quarter -- a wide price swing that closed about even.

Even more interesting, Friday was the second straight day that this happened. Oscillations back to mean are the hallmark of indecision, and the fractal rhythm suggests that tension is increasing, probably towards a break. Other indicators, such as a rising VIX, support this idea. It's getting tight in here.

With every shred of economic data instantaneously available world-wide, it's easy to forget that, in the end, the stock market is really about earnings and what we're willing to pay for them. Whether it's tariffs, new home sales, the Fed or the price of oil, daily volatility springs from improvised profit recalculations. The indecision we're seeing in both long- and short-range charts is likely due to uncertainty about the earnings outlook for Q1 and beyond.

The slowdown is clearly upon us, yet Standard & Poor's has announced that -- with 92% of company estimates in -- Q1 for the SPX is poised to be its 19th consecutive quarter with double-digit earnings (10.5%). Of course, an epic wall of skepticism faces both this forecast and forward guidance. As a result, neither Buyers nor Sellers are willing to commit beyond the recent narrow price levels. Instead, investors engage in the schizoid pattern of selling the rallies, then immediately buying the dips.

The daily chart below shows the indecision on a short-term level. Thu/Fri left back-to-back bull hammers on accelerating volume, but price failed to climbed back above the 50-day both times. The indexes are growing oversold and OBV is positive, but MACD is dead-in-the-water. Is the chart below printing a bull flag, or are new lows ahead for a possible W at 2350?







So, which way will the market break from here? The truth is that there are powerfully conflicting signals. For example, leading stocks have been holding up remarkably well, and market internals throughout the past week were mixed at worst. On the other hand, the NASDAQ weekly chart below shows a descending MACD, indicating a prevailing downtrend. Also, OBV looks weak and ready to cross below trend.








For most investors, a better question than, "which way will the market break?" is "how should I be positioned?" As the indexes sit unchanged for all their trouble in 2007, a look at the chart below shows the rewards of picking the right stocks. It's been mentioned ad nauseum, but this really is a stockpicker's market.

This chart also offers a cautionary tale about listening to the mainstream press. For months, the pundits have been touting defensive stocks like Consumer Staples and Healthcare. However, trusting the market instead of the experts would have led you to far greater gains in Utilities, Materials, Energy and even the Transports. The message here is that the best way to improve your results is to follow the money, rather than relying on the predictions of pundits.








The monthly chart looks like March was very constructive, pointing out how indecision can create different looks depending on the time frame. The SPX monthly looks even better.








Saavycharts, thanks for all of your contributions -- they're excellent -- and thanks as well for the question about energy/oil. Energy appears to have resumed a new leg up, though timing a decent entry is always important. Currently there's an unstable and incalculable Iran premium, and the refineries have had a very good run lately. This favors a pullback soon, and XLE looks to be starting a cup n' handle rest period at the perfect spot for a handle. Pullbacks aside, energy looks like eventually there's more upside ahead, especially for the drillers.








Looking ahead, it looks like more chop next week, with downside risks remaining elevated. However, lots of stocks are setting up beautifully, so if you're in the right spot, you can escape a lot of pain.

Until then, have a great weekend.

best

dk

Markets Reverse Course

I boarded a plane shortly after the market turned negative on Thursday, and it was looking ugly, especially for tech stocks. So tonight, it was surprising to learn that buyers stepped in, reversed direction and drove the indexes into a positive close.

Leading stocks held up well on Thursday, as the IBD100 gained 0.4% and most component stocks technically remain in good shape. However, 4 IBD100 stocks were brutally decapitated Thursday on heavy volume, marking the worst selling the IBD100 has seen since following-through on Mar 21. This troubled Jonah Keri at Investors Business Daily, though a review of all 100 stocks tonight showed the damage is still very contained.

On one hand, the market faded a strong upgap 37 points lower into negative territory, which is not what you want to see the day after a distribution day. On the other hand, the markets then bounced off important, 5-month support to close higher on stronger volume.

It's a real tug of war, and tonight the market remains a riskier, more volatile place than it's been in months. The once languishing VIX -- in a stupor for months around 10 -- is now 50% higher, closing on Thursday at 15!

The pros also are culling the herd, offering an excellent time to build watchlists. Stocks advancing on big turnover -- like steel and agriculturals did on Thursday -- could outperform once the market settles down and starts trending again. Also, take note of anything hanging in there on quiet trade. It's a good sign. Use caution with stocks selling off on heavy volume.

End of week, end of month, end of quarter and a naughty Iran. Tomorrow could be an interesting day.

best

dk

The Greenspan Put

On Wednesday, Alan Greenspan went from loose cannon to economic revolutionary, as Bernanke crossed the line and capped his former boss during Congressional testimony.

Public takedowns are how martyrs are made, and recession hawks gained a new patron saint. If you'll recall, on Feb 27 the US awoke to learn Shanghai had tumbled 9% overnight. A few hours later, Greenspan popped off and said that each month away from the last US recession is just one month closer to the next one. He then laid 1-in-3 odds that 2007 is The Year, and the Dow dropped 416 points.

Based on today's action, something similar may happen by Friday (just kidding).

Seriously, the market took an undisputed technical hit on Wednesday as Bernanke did something that Greenspan rarely did: Bernanke told the truth in plain English. The "truth" is that -- all things equal -- the US economy still isn't weak enough to cut rates. Wall Street hated that, and so volume accelerated 9% as institutions dumped shares.

Even so, the exits were hardly crowded. Volume was still below average, and the IBD100 did no worse than the NASDAQ, shedding 0.8%. Even though 13 IBD100 stocks closed lower on higher trade, just 3 of those were true distribution days. Investors still aren't ready to sell their best stuff just yet.

Even so, what today's action says -- in plain English -- is that tonight the market's a riskier place. Does this mean we go lower tomorrow? As Buddhabob implies (in less than plain English - LOL): you just never know.

The Composite gapped to the 50-day, and then closed lower on higher trade. Not my favorite. Red ADX is climbing, OBV is under MA(20) and Money Flow is below 50. Time to be careful.






The Banks want their raw material to be cheaper and the Fed isn't budging. The BKX closing below its 200-day is a bad sign.






Ouch. So much for Dow Theory.





Bernanke distanced himself from Greenspan's position and testified on Wednesday that recession risks are still remote. The bond market agreed and the curve healed another 1.09% today (that's a lot). The chart below is a 17-year chart of the Yield Curve. You can compare the year-long inversion in 2000 that preceded the 2001 recession, with the one we seem to be coming out of now. The current inversion is not as clean, as intense or as long. You can judge for yourself what this does or doesn't mean.

For the record, lots of pros say this sloppy inversion is the footprint of a supply and demand anomoly -- a tsunami of foreign money ("a savings glut") looking for a place to park itself. Whether it's that or the sign of a mild upcoming recession, only time will tell.




I leave in the morning for 10-days. I should be able to check in, but most likely it'll be dk Lite.

Whether it's the indexes or the stocks in your portfolio, remember this: up or down, volume tells you if it means something or not.

See you from the road.

best

dk

Housing Gets Messy

They say it's never over until somebody goes to jail.

It sure brings back memories to see an FBI logo at the top of a post, but on Tuesday, the Bureau began sniffing around Beazer Homes on a mortgage fraud probe. Meanwhile, weak consumer confidence did what poor home sales couldn't: buyers sat on the bench all day Tuesday and watched stocks slide lower.

If Tuesday had the feel of a buyer's strike, it's because even though the losses were real, the selling was light. Composite volume finished unchanged, and NYSE trade actually fell 5%. There's been no distribution in the past 5 days since the follow-through, which is good news for stocks. How long this spring fever lasts is another thing altogether.

Despite any uncertainty, investors remain in no rush to dump the best-of-breed. On Tuesday, the IBD100 did better than the broader market and slid just 0.5%, even though only 32 of 100 stocks closed higher. New Highs fell to just 8, and 8 stocks printed distribution days, both of which are typical numbers on a pullback,

The chart below shows that today was also an inside day, not just for the Composite, but for all of the major indexes as well. Throw in low volume, another close above support and MACD ticking positive, and the market continues to have a bullish bias. Considering the shaky economic climate and wobbly geopolitics, it's remarkable things aren't worse. For the record, a close below the 50-day on big volume and things will be worse.






Reading comments from LEN today about their numbers prompts me to offer some straight talk on the housing mess. Today, the LEN CEO Stuart Miller said that it's "unclear whether there's another shoe to drop" in the US housing market. I assure you there is, and it's a Size 22 EEEE.

Economics 101 teaches us that the house debacle won't be over until one final phase occurs: home prices must tumble. LEN's numbers were so bad in part because they refused to lower prices. Price slashing is essential because it's the only trick left that will stimulate demand. Subprime fiascos and rate cut hopes are a sideshow. Lower prices are the only medicine, but they're like chemo: they make everyone's hair fall out.

The chart below shows that the move to price contraction is a race against time. There are three easy stops: 220, 195 and 175. If sellers don't give up and cut prices by then, anything lower -- like 140 -- will be very hard on everyone. LEN CEO Miller said today that he can't forecast when conditions will improve, but now you can: when all of his hair falls out.






Paradoxically, just because the housing mess is going to get worse doesn't guarantee the US will fall into a recession. If you'll recall, last Thursday I pointed out that the 2yr/10yr Yield Curve officially became un-inverted. I was certain the mainstream press would be all over this improvement in the weekend rags, but strangely enough I found nothing. Well, as it turns out neither did Mark Hulbert.

On Tuesday, Hulbert wrote a great article on how the professional silence about the repaired Yield Curve shows the difficulty in remaining objective in this business. As of Tuesday, no economist who touted the inverted yield curve has stepped forward to even acknowledge its repair, much less to comment on what any further improvement might mean. For the record, the curve has continued to improve since last week.






With Bernanke on the Hill on Wednesday, volatility should pick up a bit, and volume will have heightened importance.

Until then, have a great night.

best

dk

Stocks Bounce Back

It's unlikely that US investors actually are on crack -- or chloral hydrate for that matter -- though they do appear to have developed a surprising immunity to weak housing data.

After recovering in a matter of days from the sprawling subprime mortgage fiasco, stocks spent all of 15 minutes Monday morning grieving the corpse of positively dreadful new home sales. After a sharp, 15-minute selloff, stocks climbed for the rest of the day, with the NASDAQ and SPX even managing a positive close.

Market internals reveal this was no accident either. Composite volume accelerated 5%, and New Highs dwarfed new Lows 322-62. The internals also revealed just what a stockpicker's market this really is: 63% of all the shares traded on Monday were buying just 44% of available stocks. Breadth took a hit, but the pros knew exactly what they wanted to buy.

Stocks on the IBD100 continue to be on that list. The fundamental leadership gained ground yet again on Monday, and a remarkable 24 of 100 stocks on the IBD100 tagged record highs. One of the most reliable canaries of future market direction, this index is not giving signals of a market that's ready to fall apart.

Considering Monday's low volume, the chart below looks suspiciously like the pros were at work. This is just speculation, but it appears that investors used the weak housing data to pull the bid down precisely to the 50-day, then scoop the now-on-sale stocks all back up again. If it seems odd to buy this market in the face of such grim economic data, there looms an even greater oddity: where are all the sellers?





In addition to last week's 5-10-20 index Buy signals, more buy signals continue to emerge. Positive MACD crossovers occurred last week for the NDX, today for the SPX, and tomorrow most likely for the NASDAQ. Next to moving average crossovers, MACD crossing above zero is one of the original TA buy signals.

Yesterday over at the VIX board I noted that the recent VIX spike points to a decent IT entry point for stocks as well.  No signal is ever perfect, but stocks historically have fared well after similar VIX bursts.  If you toss in the much-discussed 9-to-1 day and the unusually bearish investor sentiment, a good mix exists for a tradable rally going forward. For those of you who haven't spent much time at the VIX board, Bill Luby (Bobo) is posting some amazing work both over there and at his blog, Vix and More.





The 60-minute chart below shows how buying bullishly accelerated into the final hour, closing the NASDAQ literally at its high of the day. End of month, end of quarter, tax season, Bernanke testifying to Congress on Wednesday -- and this chart -- all point to the possibility of more gains this week.






Considering the housing data, today's action was definitely surprising. However, the market has had a bullish bias since the Day 6 follow-through, and today's reversal shows that bias is still in place.

Tomorrow we get consumer confidence data, which is expected to dip lower for March.

Until then, have a great evening.

best

dk

A VIX Buy Signal?

Naturally, I defer to Bill Luby for the final word, but the recent VIX spike may be marking a decent IT entry point for stocks. Few signals are clean and immaculate, so a stutter-stepping shakeout may happen before it's all over. However, stocks have historically fared well after similar VIX bursts. If you toss in the much-discussed 9-to-1 day and the unusually bearish investor sentiment, it may all add up to the right mix for a tradable rally.

best

dk

5-10-20 Buy Signal

As some of you may remember, last fall I found a chart of a 5-10-20ema timing system stuck away and forgotten in an old watchlist. As I recall, there was a paid service that used this MA crossover as their basic engine, though I have no memory of which one. Anyway, since I rediscovered this timer, I've kept an eye on it.

FWIW, each of the indexes flashed a 5-10-20 Buy signal on either Tue, Wed or Thu of last week. This Buy is all-the-more compelling because it comes on the heels of the first RSI 30 dip since last June(!). As you can see in the chart below, the signal is capable of ST whiplash, but longer-term it's a generally productive -- and simple -- system.

Let's see how useful it is this time.

best

dk

A Steady Hand at the Tiller

Given Iran's naval hijinx going into a weekend, the markets displayed remarkable stability on Friday.

Stocks ended a strong week on an encouraging note. The continued reluctance by institutional investors to unwind positions -- especially in the face of geopolitical weirdness -- is an important positive for the market. Even though volatility remains elevated, big investors weren't spooked on Friday.

Leading stocks continue to reinforce this positive tone. The IBD100 edged slightly higher yet again, even though just 49 of 100 stocks moved up. Despite this ho-hum breadth, an impressive 20 of those stocks hit record highs, while a scant four printed distribution days.

Over the past eight sessions, each of the indexes has essentially double-bottomed at its 200-day and confirmed back above its 50-day via a high-volume, intraday reversal. In the process, the indexes recovered 2/3's of the Feb 27 sell wave. Things may change next week, but for now these aren't the signs of a market that's ready to roll over and give it all back.

That said, recoveries are tricky business. Four weeks is short for a correction (seven weeks is the historic minimum). It's also been a shallow dip of just 6-7%. This creates odds that favor wiggling sideways and lower from here -- possibly much lower -- but who knows? So far, institutions have been stingy about giving back gains. Capitulation -- if it's going to happen -- is apparently going to require something more serious than subprime mortgage hell and a Persian version of McHale's Navy.

Going into a weekend after a week of strong gains, volume slipping 17% on a 0.1% price fade is ideal action.






For the week, both the Composite and the SPX gained a hefty 3.5%. However, these were the biggest gains for both the SPX and the Dow in over 4 years. The chart below shows that the problem was that weekly volume was merely average for all of the indexes. Considering the sharpness of Wednesday's rally, this low-volume surge carries the hallmark of short covering. Of course, that doesn't mean the market's going to give it all back either. Since the Aug 15 follow-through, the market has famously denied investors comfortable re-entry points. It will be interesting to see if that trend continues with the current Mar 21 follow-through.







Following are a few other notable weekly charts.

After the indexes, if you've only got time to check out one additional sector each day, look at the Financials. This is the single largest group of stocks on Wall Street, making up more than 1/4 of all stocks traded on both exchanges. By their sheer mass, they offer great clues as to the direction of the market.

For the record, Banks recently tumbled a respectable 10%, then bullishly repaired 76% of that fall in just six sessions. Brokers fell a whopping 15%, then reclaimed 2/3 of that move, also in just six sessions. Such rapid recoveries are signs of strength, not weakness. The kicker is that Banks and Brokers also reclaimed their 200- and 50-day averages in the process. Like the IBD100, the Financials are telegraphing a market that continues to show committed buying interest. Neither of the charts below are out-of-the-woods, but this week's action was a good first step.








Dow Theory holds that (among other things) the market isn't really healthy unless the Dow, Utilities and Transports are simultaneously all doing well. These three are now clustered in the tightest formation the market's seen in over 9 months -- since the start of the last rally. The Transports sit just 4.7% below a new all-time high, the Dow sits just 2.5% below, and the Utilities are parked just 0.5% off an all-time high. When the Dow, Utilities and Transports are all parked within 5% of new all-time highs, the market has historically performed well.










The Feb 27 tumble really spooked investors. Two weeks ago, even though the market tumbled just 7%, and leading stocks, financials and the Dow group all recovered quickly, lowrisk.com tracked the highest level of Bearish sentiment (67%) since Mar 2003! This week, despite the big reversal, Bearish sentiment improved only slightly to 61% -- the same level it was at the end of last May's sickening slide. Reactions this disproportionate to price slides are, of course, contrarian bullish. It also makes Wednesday's rally a little less surprising.







Each week, the economy continues to show fresh wobbles and bruises. However, the market appears to be discounting this weakness in favor of conditions further down the road. Next week is the end of the month, end of Q1 and tax time. That's a flammable combo, especially with the VIX parked 30% higher than it was just three weeks ago. Looks like there's a chance of more fireworks next week as well.

Until then, have a great weekend.

best

dk

Still Looking Good

So far, the rally continues to look OK.

Thursday's fractional pullback on lower volume was a near-perfect response to Wednesday's big surge. Large institutional investors hung on to their positions, and small- and mid-cap stocks actually edged higher.

The IBD100 gave positive signals on Thursday as well. It added 0.5% as 54 of 100 stocks moved higher. More importantly, 31 stocks tagged record highs, an unusually large number. As nastar pointed out, the IBD100 has already recovered from the Feb 27 selloff and hit new 2007 highs. This action shows that investor appetite for companies with excellent fundamentals remains strong. This is critical to a rally's success, and suggests that the current one still has further to go.

Adding Volume-by-Price to the chart below shows the heavy level of congestion the market's trying to work through. By comparison, the gap just above carries less baggage. The Money Flow line is clean and smooth, but ADX is tangled, OBV needs a positive day, and MACD is a mess. Add in the overbought stochastics and and you can see why it's called resistance.





As the recession risk debate continues, it's worth pointing out that on Thursday one of the two Yield Curve metrics officially became un-inverted. The 2-year Treasury yield is now lower than the 10-year Yield, a situation that hasn't existed for seven months. The more persnickety 3-month/10-year inversion still remains in place, but that's to be expected. It generally lags the 2-year in both directions, but is also falling quickly. What this means is debatable, but it certainly doesn't strengthen the case for a recession.





The rally is young and faces formidible fundamental and technical headwinds. Of course, the same was true in August. A few distribution days in a short period of time will derail this market, but until that happens, keep an eye on your watchlist for promising opportunities.

As always, your odds improve if you avoid buying or selling on weak volume.

Have a good one.

best

dk

The First Day of Spring

Spring is usually busy for me, but 2007 has been atypically hectic. It's been two months since I've posted, and I want to thank everyone for their e-mails and PM's. Rest assured, my sabbatical was merely an illusion: I've followed the market every day, maintaining my normal routine. I just haven't had the time or energy to write about it.

In my last post (Jan 28), investors were waiting for the bears to follow-through and give the stock market its first real correction in six months. As it turned out, investors would wait another full month (20 trading days) -- and 4.1% of further gains -- before the market finally obliged and sold off.

Then, in just five sessions, the NASDAQ tumbled almost 8%. Triggered by the infamous 9% down day in China on Feb 27, the US pullback sent volatility soaring and bearish sentiment skyrocketing. Last week, bearish readings at lowrisk.com hit a 9-month high. Blogger sentiment at Ticker Sense pegged the needle, posting the highest levels of bearishness ever recorded! Put buying exploded, newsletters turned bearish, QID volume ballooned, the VIX doubled, and "carry trade" and "subprime" reached pop jargon status.

Curiously, while all of this was happening, the SPX shed just 6.8% and the Dow just 6.6%. This was an unusual disconnect, made all the more strange by the price of copper. As the world-wide markets fell apart, copper rallied an eye-popping 17%. Since bottoming in early Feb, copper is up 28%.

One of the market's most famous tricks is to move higher with the least number of investors participating. It happened in August, and it happened again last week. Even after a dramatic, mother-of-all Reversal Tuesday and a double-bottom, the vast majority of investors were unconvinced. Over the next four days, the mainstream press obsessed about real estate and the Fed, and investors prepped for new lows. Meanwhile, subprimes found fresh capital, the Shanghai climbed back to its highs and shrewd investors drove 4 days and 3.2% of low-volume short-covering.

Which brings us to today. For the record, the 2007 vernal equinox also saw a classic, Day 6 IBD follow-through. Volume shot up 24%, most of it in the final 1 3/4 hours of trading. Officially, we're now in a confirmed rally, though it's still early and many things can (and will) happen. The financials were very involved today, which was the single most important thing about today's action.

If this rally holds, the increased volatility means that it will likely favor high-flyers. Stocks that suffered the least and sit near their highs are favored to be the leaders moving forward. Buy strength and sell weakness. That said, these are merely tendencies -- not laws -- and powerful exceptions will emerge.

Finally, remember that the stock market is NOT the US economy. In fact, it's not even a very good proxy for it. All of the US economic woes are very real, but the US market is another thing altogether, more global than ever, with its own rules and rhythms. This is why the market can rally 2% on big volume, while the economy still faces grave uncertainties. Listen to the pundits, but trust the market.

Thanks to all the great posters that have showed up over the past eight weeks. The board's a better place for everyone's efforts.

TOF, a special thanks to you for all of your work. I know it takes time, so thanks.

I'm now swamped with projects in four time zones on three continents. I'll do my best to check in when I can.

End of month, end of quarter, and three more weeks to fund 2006 retirement accounts. Maybe not tomorrow, but the markets move higher from here. How long it continues is another thing altogether.

best

dk

We're back in Snap's famous box. Though a yawning gap lies just above, getting out of this 5-month band of congestion is the real test.