Tuesday, May 26, 2009

Finally We Have The IBD Indexes Leading The Way As Stocks Rally On Heavier Trade

By Market Speculator

Stocks defied negative news from North Korea as the rogue country tested its nuclear and missle strike capabilities. Consumer confidence jumped big fueling institutional buying pushing stocks even higher and the buying continued right up into the close. Volume was up across the board compared to Friday's trade, but it was below the 50dma. Not a terrible sign, but its more showing institutions are still being a bit shy. Rapping up the day, seeing the indexes close out near the highs on volume was a positive step in the right direction.

Finally, we see the IBD indexes leading this market. The trend will need to continue, but today was a step in the right direction. It is nice to see quality growth stocks lead for once and not the junk off the bottom. Remember, in past uptrends which followed severe bear markets leaders took months to form. We may be seeing this begin to take shape as stocks with quality growth characteristics are beginning to take shape. As these stocks begin to show up and present opportunities to get long it'll allow us to get bigger in a position rather than taking small positions in speculative stocks. This is exactly why we stress keeping the powder dry for opportunties to get long quality stocks.

Other notable positive is news is the number of New Highs hit relative to New Lows. The NH vs NL ratio ran better than a 7 to 1 ratio showing the market continues to have strength from within. In John Boik's research he found that when the NH vs NL was favorable the probability of Monster Stocks appearing soars. Although I do not trade off of the Nh vs NL ratio it is a simply another secondary indicator that hints at the power of this uptrend.

Keep perspective is quite difficult for most as we have rallied off of a massive downturn. This uptrend will not mimic prior uptrends which started with downturns of only 20-30%. We have to look back to prior uptrends off massive decline, much like the 1938 rally. The 1938 rally was far from pretty as it witnessed turbulent consolidation periods and leadership took more than 3 months to emerge. We are now bumping up against the 3 month mark for this most recent uptrend. It should be interesting if we see a pick up in the IBD indexes to push this market higher.

A few things to be concerned with is the number of Distribution Days remaining on the NASDAQ and Dow Jones Industrial averages. At the moment, both indexes have 4 distribution days in recent weeks. History has shown when a market flashes 5-6 distribution days the uptrend is broken and we need to raise cash. So far we've avoided ending this rally prematurely. However, it is something we should be aware of and if our IBD leaders begin to crack and fall apart we'll need to raise our cash levels and look for shorting opportunities. With that said, the positives are outweighing the negatives, but we need to keep our heads up and avoid from being blindsided.

I am very happy to quality leadership emerge, it sheds some light on this uptrend which has been lead by Junk-off-the-bottom stocks. It is what it is, nothing wrong with an uptrend lead by the JOTB stocks. However, for a sustainable rally and a chance to get large gains in stock you need quality growth stocks as your market leaders. We'll be continue our quest in finding the market leaders and as always we continue to right on top of this market.

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