In A Shocking Twist Of Events, Stock Indexes Pullback; NYSE Picks Up A Distribution Day

June 7, 2007

Stocks pulled back for the second day in a row, after a bunch of bearish headlines crossed the market. Early on, the European Central Bank ranks interest rates to 4%, the Labor Department’s non-farm productivity rose 1% in Q1 below estimates of 1.7%, and the labor cost rose 1.8% above estimates of .6%. All of this can be summed up in one word: inflation. And that is what traders focused on today.

However, stocks did not close at their lows, after an early afternoon rally helped bring the indexes up before a last hour pullback. At the close the SP 400 lost 1.2%, the NYSE and SP 600 lost 1.1%, the DJIA lost 1%, and the Nasdaq and SP 500 lost .9%. The seven day streak of leading stocks outperforming the market came to an end today. The IBD 100 lost 1.2% and the IBD 85-85 lost 1.5%. At least it was only one index and not both. The IBD 100 kept pace with the SP 400.

Despite the losses, volume did not have that feel that the big boys were going out of their way to dump stocks. Volume was only 2% higher on the NYSE and volume was 4% lower on the Nasdaq. Breadth was very negative however, with decliners beating advancers by a 4-to-1 ratio on the NYSE and by an 11-to-5 ratio on the Nasdaq. This had the feeling of a sector wide flush of weak longs. Confirming this, only six of 197 IBD industry groups gained ground. That feels a little oversold.

The one internal stat that is a bit concerning and odd to see with the markets so close to all-time highs is the number of new lows on the 52-week low list. There were 91 new lows to 121 new 52-week highs. That is a bit of a scary number to see, for people that are very long like me. This tells us that there is some real hidden weakness underneath this bull market. This tells me that this bull, whenever it decides to actually end, is going to end in a not-so-nice fashion.

Even after two days of selling, I don’t see any real heavy dumping by institutions. I am even finding it hard to find good potential shorts in my scans. That along with the partial sales that showed up today show me a market that is still very strong. I did not have anything crash or any great stock I was long that I was forced to sell today due to a nasty break. It really just had a feel of a normal pullback in an overbought market.

This doesn’t mean a big selloff can’t happen. We now have four distribution days on the NYSE and six on the Nasdaq so they are adding up. But as long as these indexes are over the 50 dma, there is no reason to really even think about shorting. Because, remember, the best time to short a stock is MONTHS AFTER it has topped. This is when they selloff the fastest and you can pocket some quick gains. As a stock tops it is too choppy and random to make “easy” money in.

There is no easy money. But there is an easy bet. Being bullish. As this market continues to rise, traders keep shorting it. The put/call hit 1. That along with the NYSE short ratio being at five year highs shows that traders are still betting against this rising market. Betting against the trend is the wrong way to invest in the stock market.

Some newsletter writers are also turning bearish, as the Investors Intelligence survey has bulls coming in at 52.2% down from 53.8%. This is by no means super bullish. But it is bullish, when the crowd is bearish. And with the newsletter writers getting bearish, the option traders betting bearish, and the short interest rising on the NYSE, you can bet that stocks will want to climb this wall-of-worry. On top of all of this, I do not even have any charts in climax runs. How can you top without climax runs? Well you can but you really can’t, since all the long-term tops have coincided with stocks going into and topping with climax runs.

Thursday is another day. Great luck and I will see you in the chat room (which has just erased all my previous post with starling, stockshark, randyy, and vivek). It was a great convo and many great topics were discussed so it is disappointing to see it erased. Aloha!!!

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