Saturday, June 02, 2007

Leading Stocks Lead The Way As A Very Bullish Week Comes To A Close; NYSE Short Interest At Five-Year Highs

A lot of strong economic data helped stocks finish higher, on Friday, but they were off from their early morning highs. However, the closes were still impressive and the DJIA even had a very strong final hour, even with the Shanghai market falling another 2.7% (still up 50% this year). At the close the SP 600 hit an all-time high rallying .8%, the NYSE hit an all time high rallying .6%, the SP 500 hit an all-time closing high rallying .4%, the Nasdaq hit 6 1/2 year highs rallying .4%, and the DJIA rallied .3% hitting another all-time high.

The most important action, came in the form of leading stocks. The IBD 100 gained 1%, marking the fifth session in a row that the IBD 100 has outperformed the broad market. Leading stocks leading the market tells you that this rally is strong and should have some real legs behind it. It has taken a long time for these stocks to establish a dominate role in this market, since the March 2003 - May 2006 period, but now they are taking the lead from the DJIA. Let’s hope this continues.

Volume was 19% lower on the Nasdaq and 11% lower on the NYSE, which kind of puts a damper on the gains. But the figures for the week confirm the markets strength. The SP 600 was the strongest performer with a 2.8% gain, the Nasdaq followed with a 2.2% gain, the NYSE gained 1.7%, the SP 500 rallied 1.4%, and the DJIA gained 1.2%. The IBD 100 blew away the competition, with a 3.9% gain. This is what you want to see. This is something we really have not seen since the bottom last July/August. Welcome back leading stocks!

There were two advancers for every stock that declined on the NYSE and there were three winners for every two losers on the Nasdaq. New highs finally picked up, with an impressive 799 new 52-week highs. This kind of expansion should give the doubters of this rally some reason to turn a bit more bullish. If that doesn’t work, they have the put/call ratio still up there around the .75 area. That is not high but it is not low either. The most important and telling internal is the amount of short sellers out there.

The NYSE short interest ratio is at its highest level in more than five years at 7.74. This shows major pessimism amongst short sellers and this should keep the market bullish. It is not a given but the high short interest ratio with a higher put/call ratio shows that the crowd is still on the wrong side, despite some surveys.

The AAII survey has come out with 45% bears and only 33% bulls, confirming that the retail crowd is shorting the upticks. One of the most dangerous, arrogant, and ego-driven trade you can possibly make in such a strong tape. Most of these traders are trying to “outsmart” the market. A play that has a very low success rate.

Other surveys, however, show the opposite. The Investors Intelligence survey still shows a very high amount of bulls and the most recent weekend poll is showing 57% of the readers bullish. However, by looking at the post on Rev Shark’s blog, it doesn’t seem that many are bullish on this tape. A lot of the readers leave much to the imagination, anyways. I don’t see too much talent around there.

The other clear fact that the actual trading is not bullish for the retail crowd is the fact that equity ETF’s saw outflows this week. You don’t see that at tops. You see extreme inflows into mutual funds and ETF’s. This shows that the crowd is skeptical on the current rise. Being emotional in the market and betting against the trend is an even worse double whammy that is sure to keep you from beating the market in the long run. If I wasn’t on margin I wouldn’t be beating the market this year. That tells me exactly how rough the current uptrend really is. It is not as easy as it looks–unless you are a daytrader, then I assume it is safe to say “it is easy.” Let’s see how long that last.

What does seem to not be lasting is the weak economy. On one of the busiest weeks I can remember this year, economic data came rolling in confirming what I have been saying all year long–this economy is on FIRE!!! Yes, GDP did come in at its lowest level in five years but it appears to be a short-term thing as the numbers this week confirmed that everything appears to be fine with the economy. That is confirmed by the banks finally getting a bid this week.

The strong economic data on Friday came from the payroll figures as jobs grew 157,000 in May above expectations. The core inflation reading came in at only .1% which was below expectations also. Overall a good report. Then the ISM manufacturing index climbed to 55 in May, showing expansion from April. A reading over 50 is bullish. These kind of economic numbers is why this market never goes down. The DJIA and SP 500 are now up 8 out of the last 9 weeks. An unbelievable run, to say the least.

This unbelievable run is allowing for a TON TON TON of breakouts. Everywhere I scan, I can find breakouts. So that confirms in my mind that this bull still has room to run. If we do reverse now, I can tell you it would be very significant because this many stocks breaking out of fresh bases should mean that the market is going to run. A reversal would be a fakeout breakout and would trap many longs. If I could, and if I was a billionaire or even a millionaire (I am still young and live on Maui, don’t forget that), I would be long 500 stocks right now. There are just that many nice charts. They are not all green and pretty but they are still there. Stocks like TLVT are easily passed with all the nice charts out there. However, a gain of 15% in three days shows that every breakout seems to be working here.

This market does require a lot of work to keep up with the gains in the NYSE, compared to other bull markets. This is in direct correlation with the VIX. Remember, a low VIX, means lower volatility and when stocks rise they will not go up as much when the VIX is at 12 than if the VIX was at 32. All the stocks you see up 100% would be up 300%, if this rally came right after a horrible bear market like the March 2003 was. Even though the gains aren’t as much, the duration is a lot longer. This makes it hard work and can really put a drain on you. I know it is me. I really want a pullback, I really need a pullback, and I just want some time to relax. I doubt I am going to get that.

What also confirms that I doubt I am going to get that? Well after eight out of nine weeks of gains, why should I expect anything else. And the 10-year yield is now confirming what I have been saying all year. The 10-year is now at its highest level in nine months, at 4.94%. The odds of a Fed cut this year fell to 16% from 100% a month ago. Remember, in the world of stocks it is the opposite of what you would think would work. A Fed raising rates tells us that the economy is on fire and they need to slow it down. A Fed cutting rates tells us the economy is in trouble and they need to fill it with cash. With the odds increasing of no rate cut, you can rest assure that this economy is doing just fine. This should be bullish for stocks.

To finish this weekends analysis off I want to state that I don’t think the USA is in a bubble AT ALL. China may be in a bubble but if anyone has IBD and can remember the chart comparing the seven year run-up to the DJIA 29 and Nassy 00 top, you can clearly see China could have a long way to run. Especially since the Nasdaq had a P/E over 200. I believe China is around 45-50.

I did see some bubble action in a lot of stocks last month. But they have either fallen and that money moved into other leaders or they are still holding up. Two personal longs that I saw go into OBVIOUS climax runs (TNH and ONT) were both sold and since then the move has looked like the correct one. TNH is still holding but ONT looks done. Either way those charts had climax runs. There aren’t too many out there like that. Heck, I can’t even find stocks to sell. I only had two partial sales and zero complete sells out of 240 longs (70 are major holdings, the rest are for rent money and fun). The day before there were also no complete sales. Stunning. Normally, even in bull markets, there is always one or two that needs to be cut. Not in this market.

Enjoy the rest of your weekend. Go Anaheim!!! Go Cleveland!!! Aloha and I will see you in the chat room.

top holdings up this week - purchase date

KNOL 365% - 1/12/06
TRCR 350% - 1/12
PTT 240% - 11/16
MA 202% - 8/2
CCOI 152% - 9/27
TTEC 146% - 8/25
ULTR 122% - 10/27
HRZ 115% - 9/27
MFW 115% - 1/29
MEH 113% - 8/30
KHDH 108% - 5/30/06
IHS 106% - 12/21/05
CPA 104% - 9/15
MOS 104% - 10/12
CRY 103% - 1/10
NEXC 101% - 10/25
PRGX 96% - 1/12
CXW 92% - 5/19/06
IGLD 91% - 10/26
DECK 86% - 9/13
EVEP 83% - 11/16
JSDA 80% - 12/20
CNH 79% - 11/2
VDSI 78% - 1/4
APLX 77% - 9/28
HURN 77% - 9/13
MVIS 76% - 12/21
MCZ 74% - 3/27
IMMU 73% - 12/19
FTEK 67% - 10/6
TTG 64% - 11/30
NSH 61% - 12/19
LFL 61% - 12/13
BMA 56% - 10/24
TESO 54% - 2/16
NTL 50% - 4/13
SCI 50% - 10/10

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

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