Saturday, April 28, 2007

Stock Indexes Close Mixed And With Little Change, On Lower Volume; DJIA Up 19 Out Of Past 21 Sessions

Despite amazing earnings reports from BIDU, MSFT, VSEA, MFW, DV, TEX, MTD, NOV, VLCM, NTGR, and DRIV, stock indexes decided to focus on the early morning GDP report and opened flat to slightly lower. GDP growth came in at 1.3% in the most recent quarter, down from economist 1.8% expectations and a four-year low. The poor GDP reading and the fact that YOY inflation is running at 2.2% definitely had a slightly negative impact. This poor reading helped the Euro hit a record high against the US dollar. The poor numbers were enough to keep the market choppy most of the day but the DJIA still hit another all-time high.

At the close the DJIA and the Nasdaq led the way higher with .1% gains, the SP 500 finished flat, the NYSE fell .1%, the SP 600 fell .3%, and the SP 400 led the way lower with a .4% drop. Leading stocks, in the form of the IBD 100, did not lead to the upside but they did not lead to the downside either, falling .2%. A respectable showing.

The most impressive index out of the group continues to be the DJIA. The DJIA is now up 11 of the past 12 days and up 19 of the past 21 days. This is only the third time in the past 110 years that this index has closed up 19 of the past 21 days. The other two times? 1927 and 1929. How did that turn out? I think if you have done any research on your own, you know how it ends.

Volume was lower across the board, with volume coming in lower on the NYSE by about 12% and lower on the Nasdaq by about 14%. The most troubling of today’s action was breadth. Breadth was negative across the board and negative by a fair amount, despite the small gains and losses. Decliners beat advancers by a 4-to-3 margin on the NYSE and by an 8-to-5 margin on the Nasdaq. This negative divergence in breadth has been a constant theme all week long. New 52-week highs came in at only 388 but new 52-week lows were only at 68. So at least the new lows did not expand.

For the week, the DJIA and the Nasdaq led with 1.2% gains, the SP 500 and SP 400 followed with .7% gains, the SP 600 rallied .4%, and the NYSE gained .1%. The best news came from leading stocks. The IBD 100 gained 1.6% on the week, finally outpacing the broad market. This impressive week gave the indexes their fifth up week in the past six weeks and the fourth up week in-a-row. This market is clearly starting to enter a semi-crazy phase.

Despite the market not making much headways the past two days, there have been an insane amount of action in individual stocks during that time. Many stocks are gapping up and continuing to rally afterwards after reporting great earnings. Other stocks are going into climax runs which is starting to produce some substantial gains in a lot of the old leaders in metals and other steel related stocks. You can see a list of these climax runs on the Gold forums, if you are a subscriber. It is best to look at the stocks listed on an arithmetic chart going back to 2002. There you can clearly see that a lot of stocks are going on climax runs after years of strong gains. These kind of moves happen when too many people are shorting rising stocks. With the put/call still at .84 it is clear people are still betting against stocks even as they rally.

Another clear sign of out-of-control momentum can be found in China’s Shanghai index and the stocks in that index. A gold subscriber Randyy has posted an index chart and three charts of stocks clearly in parabolic rises. His charts are just as pretty as the charts in TC2007. I definitely recommend taking a look if and when you have a chance. You can clearly see it is getting down-right scary the mania that is going on in China.

The other thing about this insane rally is that the DJIA is clearly the leader now. The fact that after four plus years of gains that the DJIA is now leading clearly shows that we are near the end of this great bull market. The only positive to come with the DJIA gains is the fact that small cap stocks are still moving higher. As long as small caps and leading stocks can keep pace with the DJIA I doubt the top is going to happen tomorrow or very shortly. There is probably still plenty of time left for stocks to rally, even with the crowd getting more bullish and less bearish.

Since I go with the trend (ALWAYS) of the market, this market has been treating me very well recently as many of my top holdings representing significant portions of my account make substantial gains at this point in the rally. Still, back in 2003 when this rally started, people were bearish everywhere and I had charts breaking out of beautiful patterns on strong volume that made gains immediately. Despite being very long still, the recent buys simply don’t explode like they did when this whole thing started. The other clear thing about that rally was that everything was clicking on ALL cylinders. The only thing that was constant was the bearishness as stocks rose.

This time the crowd is very bullish and there are many warning signs that are starting to show up underneath the recent price gains. Some clear negative divergences that I am worried about are the relative strength of the Nasdaq and IBD 100 lagging well behind the SP 500, the moneystreams (technical indicator in tc2007) in the indexes are making lower highs with prices making higher highs, the amount of new 52-week highs keep decreasing on every new high in the markets (Nov-Jan-April), breadth is starting to be negative everyday even during the days when stocks rise, sentiment indicators are all bullish (realmoney, marketvane, investors intelligence, and AAII), GDP is trending down, and earnings growth is below 10% for the first time in four years. This is all troublesome. None of this existed during 2003 when this rally started.

The positive are few but still very important. The fact that the put/call is at .84 shows that the traders are still shorting this rally and the VIX is still not at new lows, despite the markets being at higher highs. There is more volatility in stocks right now which are producing better gains than the gains from August to late February. This is a positive but is typical of markets in speculative stages. This divergence however positive right now is actually bearish in the long-term as it shows the market is setting itself up for a dramatic move; that move would probably be lower, since the VIX is trending higher.

So to sum things up, this market is still trending higher and we must continue to be long here for some potential huge gains. But the fact that the DJIA is up 19 out of 21 and that hasn’t happened since 1929 is just showing you how insane this market has gotten. We are clearly in a very speculative stage and with all the breakouts I am still getting there should be more upside, but we must be ready for the eventual sell-off. When that happens it is probably going to be very ugly.

It is going to get ugly because everyone I know is long the stock market now and all the perma-bears that used to be around in all the chat rooms that I monitor are now virtually gone. There is also very few people talking about the possibility of the bubble popping. Instead I am starting to hear those famous words: it is different this time. Sure it is! Sure it is!

The one thing I want to make sure is that people that are thinking of going long DJIA stocks here should NOT move their portfolio into these stocks just because they are outperforming on the short term. Over the long-term it is clear that top stocks that breakout from sound chart patterns and that have great fundamentals via earnings, sales, ROE, and profit margin clearly outperform these stocks in the long run. Don’t forget, despite the DJIA beating the IBD 100 the past three months, since May 2, 2003 the IBD 100 index is up 164.5% compared to the SP 500’s 59.6% gain. It is clear where the big money is made: in top stocks.

There are more earnings and a lot of economic numbers coming up this week so traders are sure to have plenty of reasons to move stocks all over the place. Even though I don’t like all the negative divergences I have, as long as the trend is up I will keep riding it. Maybe the old axiom of sell in May and go away will come to fruition but until it the actual selling shows up it remains foolish to sell now. There is still a very high wall-of-worry out there for stocks to climb.

Aloha and I will see you in the chat room!!!

Market Commentary At Big Wave Trading Bronze Level One

New Swing Longs: Silver Level Two

New Swing Shorts: Silver Level Two

Stocks On My Watchlist: Gold Level Three

Complete Profits/Losses: Gold Level Three

Partial Profits/Losses: Gold Level Three

MauiTrader Forums: Gold Level Three

MauiTrader Chat Room: Gold Level Three

Longs Up On The Day: Gold Level Three

Shorts Up On The Day: Gold Level Three

Top Holdings Up This Week - Date Of Purchase

KNOL 353% - 1/12/06
TRCR 265% - 1/12
AKAM 191% - 9/30/05
TTEC 171% - 8/25
TNH 156% - 10/26
JSDA 155% - 12/20
MA 128% - 8/2
HRZ 115% - 9/27
MFW 109% - 1/29
ONT 105% - 12/21
MEH 102% - 8/30
IGLD 101% - 10/26
CPA 101% - 9/15
EVEP 98% - 11/16
ULTR 97% - 10/27
HMSY 94% - 6/23
ANO 94% - 2/14
PAE 90% - 3/22
CLRT 86% - 11/30
EPHC 85% - 12/20
LTS 85% - 1/11
BAM 83% - 11/17/05
MOS 82% - 10/12
KHDH 78% - 5/30
VDSI 72% - 1/4
CXW 71% - 5/19
PERY 65% - 10/4
CNH 64% - 11/2
DECK 62% - 9/13
IMKTA 61% - 8/28
XOMA 60% - 1/12
SLP 58% - 2/5
RKT 55% - 12/4
MNTG 55% - 11/9
TESO 51% - 2/16

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