Saturday, June 16, 2007

Tame Core CPI Data Traps The Bears As Stocks Rally On Heavier Volume; The Incompetent Short Sellers Just Don't Get It

Stocks started Friday off just right as stocks gapped higher thanks to a tame core CPI. The CPI moved up .7% in May–the biggest since September 2005–but the core CPI was up only .1%. That was less than the .2% expected by economist. That also lowered the YOY core CPI to 2.2% which was the smallest in 14 months. The CPI data clearly gave investors the hope that the Fed will scrap its bias to raise rates as the recent economic numbers suggest steady economic growth with mild inflation. A sign that rates and economic growth are starting to come in-line can be seen in the yield curve. It has corrected itself and now has a very positive bullish slope to it compared to where it was just three months ago when the curve was inverted.

Other solid news from the economy came from the Labor Department’s production numbers. Industrial production was flat in May, better than the prior two readings of negative growth. Manufacturing production was up .1%, besting the recent levels. And capacity utilization was down showing a lot of capacity which has inflation easing pressure.

These reports were strong enough to get buyers hungry for stocks. And when you combine that with options expiration you had the perfect mix for big stock gains on big volume. When all was said-and-done, stocks climbed across the board, with the SP 600 up 1.2%, the Nasdaq rose 1.1% to six-year highs, the NYSE higher by .9%, the SP 500 was up .7%, and the DJIA rose .6%. This sent all stock indexes near all-time highs and gave the indexes their fifteenth straight positive Friday close. For the third day in-a-row the IBD 100 led the market, with a 1.5% gain. That can only be described as perfect action in a market making strong gains despite all the bearishness.

Volume was higher on both exchanges. On the NYSE volume was 41% higher and 27% higher on the Nasdaq. Despite the higher volume coming on the back of quadruple witching, the fact that volume was so much higher on the NYSE is a clear confirmation of the rally after last weeks and Tuesday’s selling.

As for the internals, they were rather strong, with advancers beating decliners on the NYSE by a 13-to-3 ratio and on the Nasdaq by a 2-to-1 ratio. The really strong reversal to the bullish side was the new highs and new lows. The amount of 52-week highs exploded to 609 and new 52-week lows were only 70, finally sending an end to the mixed message of this statistic.

A rough start to the week was quickly corrected as we came up to the positive retail sales report on Wednesday. For the week, the Nasdaq led the way higher with a 2.1% gain, the NYSE rose 1.9%, the SP 600, the SP 500 gained 1.7%, and the DJIA rose 1.6%. However, when comparing those gains to leading stocks, you can tell that the action was where it is supposed to be in strong markets. The IBD 100 rallied 4% for the week. When you have leading stocks leading a rally, there is NO reason to be looking for a top. I could understand the bearishness before when this index was not keeping up. But being bearish now shows just a complete lack of respect for history.

Leading stocks never really got whacked (unlike the Sopranos finally–what a load of crap) when the market pulled back. The action in those leading stocks was a clear signal that there were not real problems with this market. Granted, it could have gotten a lot worse, but those stocks normally break down well before a stock market is about to top. The fact that those current leading stocks held was proof enough to me that this was not the right time to be calling a top. AAPL and GOOG, besides the current leading stocks, are your tell. As long as these stocks are holding their 50 dma’s, there is NO reason to get bearish just because everyone else is. Crowd mentality is a disease and last time I checked you are supposed to stay away from diseases. Remember: going with the crowd (after you get out of HS) is what morons do. People that can not think for themselves go with the crowd. Those people do NOT make money in the stock market year in and year out. Stay away from this thinking.

The other clear obvious reason that nobody should have gotten full-on-bearish was that all the indexes rested right at their 50 day moving averages. After touching those averages, the indexes have done nothing but rally higher. This is exactly how you want to see strong markets act. They, seriously, don’t get much better than this.

The Nasdaq’s accumulation/distribution rating has risen to a C+ from a D- on Thursday. This is an amazing jump and also should confirm the rallies strength off the 50 dma. And when you take that with the NYSE short interest ratio being near an all-time high at 7.58, you have a clear scenario where you can see the smart money buying stocks (acc/dist rating) and the dumb money (hedge funds/retail) shorting stocks. The shorts are the ones who are wrong here. The price gains prove that. The one group of traders that have been right about this rally since it started–which happens to be where the bulls and bears crossed in the investors intelligence survey–has been the newsletter writers according to the investors intelligence survey. These guys have been bullish and continue to be bullish since they crossed in June. The current reading shows 56.7% are bulls; the five-year high is 62.9%.

What could be better? Volatility. The constant gains since March 2003 without a 10% decline on the DJIA is the reason why my top stocks only have so many up 100%. In normal bull markets, that start after a downtrend, where the VIX rises to above 25, I will be able to produce at least 5 stocks up over 300% and over 20 stocks up over 100% within six months. That clearly has not been the case with this rally as the VIX has not been over 20 since early 2004 and has not seen 30 since March 2003. This is why, in 2003, everything you touched went up 100% within months using the style I have. Right now, as you can see, 50% gains are like the 100% gains and the 100% gains are like the old 200% gains. Until this market sells off there is not going to be a “sh*t-load” of money to be made, unless you are quick with trading the China or solar stocks.

However, if you just stayed with leading stocks and have been long stocks in the Chemical-Fertilizer sector you would be sitting on a HUGE gain. These stocks have been leaders for the past six months and YTD they are up 91% blowing away another other sector when it comes to performance. This goes to show, once again, that leading stocks lead the market by a LONG shot. This compares to 10% gains in the NYSE and SP 600 or the 14% gain in the IBD 100 YTD. However, either way you look at it, investing in leading stocks is where the money is.

Where the money is not is in shorting this market. With that high NYSE short interest ratio and the market near all-time highs a further short-squeeze has to be expected at this point. The perma-bear traders like TraderTim, whom if you study about will find out is a depressed near-sadistic individual, are the perfect fuel this fire needs to keep burning. The hardest thing for most it seems is to actually believe the FACTS that are appearing right in front of your face with the indexes up near these all-time highs. Most people seem to want to believe the rants of delusional egotistical arrogant self-absorbed liars. If that is the game you want to play, be my guest. I will deal with the facts of the current market and continue to play the trend to the upside and make money.

Before I end this, there is one more thing that should be known that most traders don’t seem to understand. This market is a bit oversold with the 10-day moving average of the advance/decline line well under the zero level where this oscillator judges overbought and oversold. With that in mind, the amount of stocks above the 200-dma is only at 68% compared with 86% back in February and 84% back in April. Yet, here we are with the NYSE .5% away from an all time high and the Nasdaq already at a new 52-week high, yet the market has 20% less stocks above the 200-dma. That clearly shows that we have a lot of stocks that can join the rally, that can send the indexes even higher than they are now. Some may say that this is a sign of weakness. To that I only have to say really? Then why is the Nasdaq at a new 52-week high and why are the indexes only less than 1% away from an all-time high?

Facts are facts, folks. We have a stock market hitting new 52-week highs, on near all-time short interest, with a record setting economy, and a lot of bearish headlines on your late night biased-news networks. This can only mean one thing: stocks are going to move higher.

top holdings up this week - purchase date

TRCR 466% - 1/12
PTT 341% - 11/16
MA 218% - 8/2
OMTR 155% - 9/15
CCOI 135% - 9/27
KHDH 131% - 5/30/06
TTEC 131% - 8/25
AOI 127% - 11/9
ULTR 126% - 10/27
IHS 121% - 12/21/05
MFW 116% - 1/29
MOS 116% - 10/12
SVNT 112% - 8/24
MEH 112% - 8/30
CPA 108% - 9/15
HRZ 105% - 9/27
DECK 98% - 9/13
CRY 95% - 1/10
PRGX 92% - 1/12
CXW 92% - 5/19/06
EVEP 90% - 11/16
CNH 88% - 11/2
APLX 80% - 9/28
IGLD 80% - 10/26
HURN 78% - 9/13
VDSI 73% - 1/4
NTL 71% - 4/13
LTS 67% - 1/11
XRA 66% - 5/24
ZNH 65% - 12/26
MCZ 64% - 3/27
LFL 63% - 12/13
VSNT 61% - 2/5
NSH 58% - 12/19
TESO 56% - 2/16
AFSI 55% - 4/12
BMA 52% - 10/24
TSYS 50% - 1/26
TTG 50% - 11/30

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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