Leading Stocks Outperform On A Dull Trading Day; NYSE Pulls Back On Lowest Volume Of The Year

May 5, 2008

It was yet another very low volume market session that really proved nothing today that we did not already know about this market. The one bright spot that occurred today that was noticeable to me by the action in the stocks that were showing up on my price/volume scans. The IBD 100 gained a very impressive 1.5% compared to the overall market which was slightly lower across the board. The IBD 100 also joined the rest of the market with A and B acc/dis ratings as it now sports a B- after today’s action.

However, the losses from the NYSE to the Nasdaq were all fine in my book as all the selling came with volume lower than the day before. What is even more bullish for stocks, for now, is that the low volume selloff was the lowest volume for the year on the NYSE. This low volume, with stocks pulling back, is just how you want to see stocks move. If you look at the Nasdaq, where it is most obvious, you can clearly see that the market is rising on higher volume and selling off on lower volume. This has been the case since March 4th and is starting to become visually quite obvious to me. That along with the actual ACC/DIS being an A- shows that this index and the stocks that make up this index are being accumulated.

Even though the accumulation is not on HUGE volume it is taking place none-the-less and as long as that is the case there is not reason to fight this trend. There are so many things that have turned in the favor of this market that I just don’t see it wise to be very bearish here. Even the ISM service, new orders, and employment indexes all moved over 50 which signals expansion. The price paid index is back up to 72.1. Take that along with the data that we are NOT in a recession and the positive slope to the yield curve and I find it hard to be as bearish as some are on this market.

Some people are really worried about the US Dollar and that is a fair argument. But the fact so many are worried just seems like the smart thing would be to take the other side of that trade. Some of the other reasons include the commodities. Oil spiked sharply today to an unbelievable $120.36 at the HOD. However, it did settle down a bit and closed up $3.65 to $119.97. Gas hit $4.25 in some parts of Maui this weekend so I am definitely feeling it. When you combine that with gold and copper, you have some fair worries. Speaking of gold, gold was up $16.10 to $874.10 which appears ready for another leg up.

But the biggest “OMG” moment came from copper which just two days ago appeared to be making a very bearish reversal as it came breaking down from that consolidation area the past few weeks. But the breakdown has IMMEDIATELY been reversed to the upside and copper actually rose another 12.7 cents to $3.9475 which is still much lower than the intraday print of $4.2605. This is one volatile, dangerous, commodity market to be playing right now. The CRB looks toppy yet the components of the index just don’t stop and are getting very wild. This is definitely something I am not interested in playing. The recent action in commodities is also the reason why I stick to stocks.

And instead of focusing on the commodities itself, I find it more productive to come to the market and focus there instead. If we do that we can see that the top 3 industry groups were part of the top-10 groups based on Monday’s price performance. The top three groups, for those living under a rock, are oilandgas-US expl/prod, chemical-fert, and steel-producers which all rose 2.6%, 2.4%, and 2.8% respectively. The gain in steel stocks put that group as #1 now based on six-month price performance. This kind of action in leading industry groups and stocks is very bullish for our market even though the high commodity prices and weak dollar appear to be extra bearish.

Other top 20 industry groups that were in the top-10 based on daily price performance included the 16th ranked metal products-distributors group with a 1.9% gain, the 17th ranked leisure-games/toys/hobby group which rose 2.6%, and the 19th ranked oilandgas-US royalty group which gained 2.2%. When you have this kind of broad leadership amongst the top groups, no matter what you think of those groups as quality of leadership, it is very bullish for our overall indexes. They can have good and bad days but when you have a slow rotation into new leaders, it normally takes a long time and sometimes while that rotation happens there is so much built up money on the sidelines that all groups rise. This is why we continue to see metal, gold, steel, food, oil, solar, and gas stocks rise with the new crop of leadership in NEW tech, retail, computer, and financial stocks.

This leadership can be seen in the number of new highs that have recently started to show up. On Thursday the new highs beat new lows and then on Friday, which was a dull day, new highs trumped new lows which was the first day the rotation finally had confirmation in price action of leading stocks (leaders make new highs, laggards make new lows–DUH!). Today the new highs were beaten by new lows but the point is that they were BARELY BEATEN despite the market being CLEARLY DOWN. On Monday there were 97 new 52-week highs to 104 new 52-week lows. But there was still clear strength in the leaders making new highs.

The most new highs came out of the energy sector. There were 27 new 52-week highs and the top stocks based on fundamentals/price action in the group to do further research on include CLR WLL SM PXD SPN CNQ PQ NE E. The metals/steel group was the next strongest based on new highs with 7 and GTI GNA SCHN are your top tier stocks in that mix. Medical stocks had 6 new highs with BABY ICLR GILD being the best out of that bunch. Machinery stocks also had 6 new 52-week highs and JST GHM GDI BUCY were all top stocks in that group. And rounding out the top spots were the computer software and business services sectors with 5 each. ANST, EBIX, ANSS, and VISN round out the top stocks in those groups.

The most impressive breadth in a negative breadth day came via the machinery-construction/mng stocks which had 25% of the group hitting a new 52-week high today. The metal products-distributors were right behind with 20% hitting new highs. These groups mentioned in the last four paragraphs is where you want to focus your money for the big gains. This is where the smart money is going.

Some stocks that did have a rough day that were once leaders included AG, YHOO, and KNDL. These stocks are clearly breaking down and if I was still long any of these stocks I would be looking to move on from these names. On the other hand there were a few pullbacks on lighter volume that I will be looking to buy/add to if they setup in a proper position. SOHU and HUSA are two stocks that I am watching for future longs. One is a very high quality CANSLIM stock and the other is a very speculative CANSLIM quality kind of stock. The point of showing these charts is to show you what I am looking for before I go long a stock. Both of these charts are very pretty and have the proper price, volume, and BOP action. If they setup in another base that last at least 5 day for a handle and five weeks for another proper base on base pattern, I would LOVE TO get VERY LONG either one of these stocks.

Even though this market seems a little short-term overbought and does feel like it wants a pullback, I have to stick with the bullish charts that are all over the place and remain in a cautiously bullish stance for now. Remember, everyone, there are different degrees of being bearish and bullish. I am cautiously bullish right now as I know we have a lot of heavy distribution resistance that we are going to have to fight through in the near term. I am also aware that volume is lower on this rally than on the selloff. That is firmly there in the back of my head which makes me think another down leg could very well happen. It is hard for me to believe we have made the ultimate lows without a HUGE VOLUME washout day where we swoon 5% or more intraday on HUGE turnover and then end up sightly down to flat total. A lot of bottoms are made slowly but still when you get a volume you still get some powerful up days on some VERY LARGE volume. Since we are still lacking those huge daily gains on huge volume in the indexes where the IBD 100 is up 6% or more, it is hard to get insanity-like excited. I remain cautiously and happily long.

Some final interesting notes before I go include the put/call is still at .84. It isn’t low at all but it is not bullish by being too bearish and over the 1.00 reading. The fact is steadily remains above .80 suggest traders still almost want to buy puts on the market as much as they are buying calls.

Worse than that is that 4% of the NYSE is now short as of the middle of the month last month and the NYSE short-interest ratio is now at 12.76 which is ANOTHER new all-time high. STUNNING, if you ask me. Not only is that stunning but the market is also very expensive at a 65.1 p/e ratio for the DJIA. I don’t know about you but a lot of value guys are going to find this market hard to buy at a 65 p/e. But when the mutual funds that are on the sideline start to put there money to work, and then those short the market are forced to cover, which leads to the momentum guys buying stocks, which then lead to the final round of buyers who buy to make a killing only later to find out no one is left to buy, which then finally leads to some of the value guys chasing performance, you are probably going to see a market that is much more expensive than it is right now.

Hopefully, the good times can continue, but if they can not that is why we have HARD CUT LOSS rules which tell us when to take profits and MOST IMPORTANTLY when to cut our losses so that we can move our pathetic money into a winner like FEED. Stay positive and remember if you ever feel a little tired of this low volume market, you can always take this time to review your past trades over the past year. Did you chase the stock? Did you buy early? Did you sell for NO reason? Did you panic? What did you do wrong that kept you from making the big gains or what did you do wrong that led to you taking a loss over 20% (try to cut all losses at 8%, if you are a first year newbie–as you get experienced you can move it up to 10% or the 50 DMA depending on the volatility of the stock). And if you don’t want to do that don’t forget it is the NBA and NHL playoffs baby!!!!!!!

Pittsburgh Penguins and Sidney Crosbey vs. the Philly Flyers and then the powerhouse Detroit Redwings vs. the extremely impressive Dallas Stars who shocked the LAZY SJ Sharks who NEVER should have lost this. Brenden Morrow is EXTREMELY talented and fun to watch and this is ONCE AGAIN going to be another exciting series.

If you don’t like to watch two teams play like it is life or death and beat the HELL OUT OF EACH OTHER unlike in any other sport I have seen–I dare you to play 4 seven-game series and play every game like it is your last game making/taking 20 plus hits a game!! GREAT LUCK! But if you don’t enjoy the most exciting form of playoffs I suggest cozying up to the TV and watching the Spurs vs Hornets or the Magic vs. the Pistons or the Lakers vs. Jazz or the Celtics vs. Cavaliers which will be on today on TNT at 3pm HST and 9pm EST.

The best part about this is I can watch the playoffs on TV, work on the stock market on my desktop monitors, and then load up MLB.TV and either watch the Mets, Cardinals, Yankees, Dodgers, or Angels play whenever I want to in near digital high-quality condition. A 10-20 second delay via a filter sends the games LIVE into my computer in near perfect quality. It is so cool to watch live baseball of your favorite team (mine being the NY Mets and St Louis Cardinals) even when you are 4000 to 6000 miles away from the locations of where you used to live. Technology IS WONDERFUL. God bless the USA and the brilliant minds that have unleashed freedom across the globe. Thanks to the USA, China, India, the Middle East, and places in S. America like Brazil and Colombia are free to expand and grow their economies at GDP clicks once thought unimaginable.

My friends, life and the stock market is pretty damn good. At least you do NOT live in Myanmar (WHICH SHOULD BE BURMA!). Aloha and I will see you in the always informative chat room!

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