Saturday, April 21, 2007

Stocks End A Very Powerful Week With More Gains; Volume Picks Up On Options Expiration Day

By MauiTrader

On Friday, stocks did what they have been doing all week, finding dip buyers that send the indexes higher into the close or at least higher than the open. A rash of good earnings from some big players like SLB GOOG AXP CAT and HON sent stocks higher at the open. But right after that very powerful gap higher, stocks started pulling back, as investors were quick to take some profits. However, once again, dip buyers came in and smart market makers did their best job to make shorting and put buying as painful as possible for the bears and sent stocks higher into the close. It was a very bullish options expiration.

At the close, the DJIA led the way with 28 out of 30 components up and hit all-time highs for the third day in-a-row, with a 1.2% gain. That makes it seven straight days and 15 out of the last 16 days this index has been higher. If that isn’t excessive, I am not sure what is. The SP 600 followed with a 1.1% gain, the NYSE was behind it with a 1% gain, the SP 500 rallied .9%, and the Nasdaq lagged with a .8% gain. It was another all-time high for the NYSE and six-and-a-half year highs for the SP 500 and Nasdaq. Other indexes hitting all-time territory include the Russell 2000, DJ Transportation Average, DJ Utility Average, and the SP 400. The SP 600 is a fraction away from all-time highs.

The good news from Friday, out of the world of leading stocks, was that the IBD 100 finally stopped its streak of underperformance, rallying 1.3%. It was a very nice change after eight of nine days of clear underperformance. Does that mean that growth investing is back in style? Probably not. We are four-plus years into a bull market. The small-caps have moved on to the big-caps. Your last leaders of secular bull markets.

Volume was higher on both exchanges, with volume rising 1% on the Nasdaq and by 18% on the NYSE. The higher volume finally gives the market a good accumulation day but the volume was driven higher, without a doubt, by all the options expiration activity. Without that activity, it is doubtful that the gains would have come on higher volume, especially on the Nasdaq.

Internals were very bullish, for a change this week, with advancers beating decliners for the first time in three sessions. Advancing stocks beat declining issues by a 3-to-1 margin on the NYSE and by a 2-to-1 margin on the Nasdaq. New highs finally expanded, with 602 showing up on the 52-week high list and 62 stocks showing up on the new 52-week low list.

For the week, the DJIA led the way with a 2.8% gain, the SP 500 was next with a 2.2% rise, the NYSE gained 1.8%, the Nasdaq rallied 1.4%, and the SP 600 lagged with a 1.3% gain. Proving that big-caps is where it is at, the IBD 100 lagged all indexes hardcore, with a .5% gain. This was, without a doubt, one of the best weeks of the year.

It was a very good week that finally saw volume start to show up. That higher volume started out badly, with the markets suffering a distribution day or two. But after Friday, those distribution days have been forgotten. Like I said it was good to see volume show up. However, the best rallies have volume show up immediately as the market is following-through. That high volume is best when it is preceded by a low volume sell-off. But as this market has shown since July and August, where the indexes started rallying on lower volume, you don’t always need a ton of volume to have a rally. All you need are some big-cap stocks to move and volume becomes obsolete.

This market is, obviously, being led by big-cap stocks, as the DJIA hits highs day after day after day. This is not a great market for CANSLIM growth investors but there is still plenty of action in the big-cap markets and the smaller low-priced junk stocks. These may not be growth stocks, but they are moving like they are at this stage of the game. If you check out the chart, in IBD, of value funds vs. growth funds, you will see that the big caps are in favor. Big-caps and value stocks is what is moving. Growth stocks have been lagging but are finally starting to get some life after Friday. However, since this is not the start of a fresh bull market and we do not have growth stocks leading, I still advise against going all-in with margin at this stage of the game.

The strength of this market has been quite impressive, recently, as there are simply no pullbacks and every small intraday dip is being bought up quickly. I simply don’t like that action as it sends many great stocks past proper pivot points and then as they don’t pullback that leaves us with no option to jump on the great stock. Instead do to proper risk/reward analysis we just have to watch them keep moving higher. Luckily, I still am having no problem finding stocks that are bouncing off the 50 dma or breaking out without gonig too far too fast. But I am missing a few stocks that I really wanted due to this.

In my opinion, the retail crowd seems very giddy and exuberant-especially CNBC. But AMTD and ETFC earnings reports show that traders are not participating in this current move higher like they were earlier. Still the traders that are trading this move are very bullish. The MarketVane survey has 75% of futures traders bullish, the poll shows 61% are bullish, the Investors Intelligence survey shows newsletter writers bullish by 52%, and the AAII poll has 46% of participants bullish. That along with the put/call being down to the .68 area clearly shows that investors are getting more and more bullish. That is giving this market a bit of a frothy feel but overall this frothiness feels NOTHING like the froth we had in early 2000. I have a lot of amateurs that I know telling me stocks are going higher. But they aren’t telling me they are going to the moon and they are not telling me that “there is no way this market is going lower.” Most still see the possibility of lower prices. That shows that the current madness that is starting is just that: starting.

The speculative momentum that is picking up pace now in the Chinese solar stocks is getting evident in the charts as these stocks are moving higher in a quite dramatic expansion as volume picks up the higher it goes. That is normally good. But when you are so far away from a proper breakout pivot point and volume is this heavy it is potentially bearish. For now it is not bearish but in the future if prices start not moving very much, you will know you have churning. Until the churning happens, though, might as well ride the trend higher. I never fight the trend and you should not either. Ride the speculative momo in these higher until the train derails. Momentum is a strange beast as it will ALWAYS last longer than you think it can.

There are many reasons for this market to go lower. The weak dollar hitting 26-year lows against the British pound, the low volume rallies, big caps leading small caps, speculative crap moving, record short interest levels on the NYSE, and poor numbers from stock trading firms are all reasons to worry about with this market. But as long as market keeps going up I am not going to worry about these.

I am worried about some internal data.The number of new highs shrinks every day. And if you look at a long-term trend of new highs since November, you can see that the trend of new highs is lower despite the market going higher. Another nasty divergence showing up is in the Relative Strength line of the Nasdaq. If you look at the highs in November, you will see that each rally after a selloff brings the Nasdaq higher and higher. Now if you look at the RS line, you will see the opposite. As the Nasdaq hit a new high in January, the RS line lagged. When it hit a new high late February, the RS line lagged even more, and now with the Nasdaq hitting new highs again, the RS line is once again lower. Lower highs and lower lows in the RS and higher highs in the Nasdaq is a very negative divergence. On top of that divergence is the negative divergence in the moneystream (proprietary indicator of tcnet). If you look at the peak in MS in February you can see now that even with the Nasdaq in higher ground (or around the same area) the MS line is well off the highs. Higher highs in price, with lower volume and negative divergences in the MS and RS line, is not bullish for the near future.

But like I keep saying over and over and over, these are just things we need to keep in the back of our head. As long as the trend is up that is where we should be investing. These things just let us know that we probably do not have a lot of upside left and when the market does turn we should be ready for some real selling.

It seems that since the February 27th market sell-off, all the previous big worries over the sub-prime market leading to a broader sell-off in financials have past. The market looks like it is expecting a soft landing, instead of a hard landing.

Showing support of that thesis is the fact that earnings are coming in much higher than what was expected by the Thomson Financial combined estimates. Those estimates were looking for a 3.3% rise in earnings, instead of the usual 10% plus earnings growth we have seen for the past 14 quarters. So far earnings have come in averaging 5.2% growth and 66% of the companies that have reported have posted better than expected results. This is much better than those low estimates but still the trend in earnings is clear. They are down. As earnings and the GDP goes, so goes your stock market.

Speaking of GDP, next week we have the release of Q1 GDP. Estimates are for 1.8% but economist are telling us to not focus on that number and instead should wait for the final revision as there will be some data problem due to automobiles. This growth, as per earnings, is slowing and below the usual 3% we have seen since the Bush tax cuts. Other items on tap include the March durable good numbers, existing-home sales, and new-home sales. Besides that we have earnings from powerhouses such as F MMM BSX HAS TXN XOM LMT COH and MSFT. This will surely cause the market some excitement as traders continue to weigh the positives and negatives of this market.

Are we setting ourselves up for the proverbial “sell in May and go away” or will earnings keep us moving higher? We will know by the end of next week. 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 332% - 1/12/06
PTT 317% - 11/16
AKAM 236% - 9/30/05
CVO 197% - 8/18/05
TTEC 169% - 8/25
TRCR 163% - 1/12
JSDA 153% - 12/20
TNH 144% - 10/26
OMTR 140% - 9/15
ANO 120% - 2/14
CCOI 117% - 9/27
HRZ 107% - 9/27
NEXC 102% - 10/25
CLRT 101% - 11/30
CPA 100% - 9/15
ULTR 95% - 10/27
ONT 94% - 12/21
EVEP 94% - 11/16
IGLD 91% - 10/26
MFW 86% - 1/29
IMMU 85% - 12/19
LTS 82% - 1/11
BAM 81% - 11/17/05
MOS 78% - 10/12
BONT 75% - 10/03
BMTI 74% - 10/25
IIVI 71% - 8/30
EPHC 69% - 12/20
HURN 66% - 9/13
XIDE 66% - 1/29
IMKTA 65% - 8/28
KHDH 63% - 5/30
DA 63% - 1/25/06
CXW 62% - 5/19
BMA 61% - 10/24
DECK 55% - 9/13
MNTG 52% - 11/9
TESO 50% - 2/16

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