Leading Stocks Take The Lead Once Again As Oil&Gas Stocks Produce Massive Gains; 79% Think We Are In A Recession And That Makes Me Bullish!

May 6, 2008

It was another overall lower volume session as the NYSE, for the 32nd day in-a-row, came in with volume below the 50 day volume average once again. However, underneath the bullish mini-reversal that sent the Nasdaq from a .8% loss to a .8% gain, there was a TON of bullish action in stocks in a wide range of industries.

When the day started off, it sure did not seem like the good times were going to continue as more bad news rolled in from so many areas that it seemed the market was due for a rest. June oil climbed $1.87 to close at $121.84 and hit an HOD of $122.73. This definitely sent some fear in the market, on top of the UBS negative banking report, the FNM and FRE announcement, and then going back to oil GS predicting it to hit $200. However, proving that markets climb a wall of worry, indexes were able to shake all of this nonsense off and most indexes closed near their HOD with every index but the DJIA up .8% (the DJIA was up .4%).

The best news was not the higher volume than the day before, either. No, the best news, once again, was the dramatic and dynamic leadership of the IBD leading indexes. The IBD 85-85 came in with a heavier volume 1.3% gain. Leading stocks continue a pattern that started about a month ago with them making moving lower on the down days and now rising higher on the up days. This pattern has really started to develop recently and appears to be continuing that path for a little while long, at least.

For all of those that are bearish, remember there is still part of the crowd that is starting to embrace it. The put/call fell below .8 today to .77 which indicates more bullish bets are starting to be made on the options market. However, on the stock exchanges, things continue to look bullish as a contrarian play with the NYSE short interest ratio hitting YET AGAIN ANOTHER all-time high of 12.82. It now takes almost 13 days of average daily NYSE volume to cover the 4% of the market that is short. This is incredible extreme and is a sign to me that you want to be on the other side of the trade.

If that sentiment doesn’t help you with your contrarian position, maybe the CNN poll of the walking sheep. Sadly, these people on the street have come in with 79% believing we are in a recession. One of my former colleagues at RM.com believes that those that use the two Q’s in a row on negative GDP are silly for using that. If that is the case, then he might be right in that we are in a recession. But if you use the back-to-back GDP readings then we are still moving higher and the economy just slowed down. The extremely biased liberal media will make sure that Clinton or Obama becomes the next President and they will bad talk this economy no matter how untrue or exaggerated it is. The fact so many see the economy as half empty is my sign to be bullish AT LEAST FOR NOW.

For those that have a problem with oil, all I have to say is “why didn’t you invest in oil stocks back in 2003 before the Iraq war?” If everyone was for sure this was going to be the result of the war on terror, why did not more people do what most intelligent investors do when something major is about to change: make an investment. If you knew prices were going higher and that GWB was going to reward the “evil oil men,” why did you not go long? Even if you blindly bought HAL, you would be up over 300%. Instead of crying, go out there and do something about it.

Some think that expensive oil and gas is going to hurt this market. In fact, everyone does, however, I think it is wise to take a look at your top leading stocks based on six-month industry price performance. If you take the time to look there you will notice the number one industry is the oil&gas-US expl/prod group which rose 4% today helping lead the market higher. Oil is a leader folks! Not a laggard. Higher oil is good for this market as they are our leaders and the rotation from safety stocks to technology stocks is also going on underneath, helping produce even stronger gains as the entire market is bullish.

That can be seen in today’s new 52-week highs to lows which, once again, favored the new highs 161 to 109! Another bullish victory and further confirmation the tide is rising. Energy stocks made up 65 of the new highs with stocks like APC, UNT, CLR, HK, HES, BRY, and SM leading, metal/steel had 11 with GTI, MT, SCHN, and GGB leading. Transportation stocks continue to run with 9 new highs and WAB, GNK, and CHRW leading there. Mining, medical, and machinery all had 5 each with JST, GDI, BUCY, OMI, GILD, RIO, RTP all being top stocks in those groups.

Other leading oil stocks include XEC, WTI, CRK, ARG, NBL, PQ, and NE. Even SOHU, GMCR, and many other leading stocks from a wide range of industries were putting in impressive gains as this rally is broad and has included a TON of leading stocks amongst a lot of industries, even though the PERFECT to near-PERFECT chart patterns STILL ARE NOT SHOWING UP minus about a handful–IF EVEN THAT!!

All of these oil stocks hitting new highs are not the only group that is showing insane performance, btw. With 32% of the US Expl/Prod stocks hitting new highs today, there were other leading groups that dominated. Steel-producers saw 28%, transportation-railroad 27%, machinery-const/mng 25%, oilandgas-international int 22%, oilandgas-drilling and metal products-distribution 20% were just some of the other industry groups with nearly 1/4 of the group hitting new highs. For a market that is well off its 52-week highs, we sure do look good, as of now.

However, I have to admit there is still just one problem. The 32 days of below average daily volume on the NYSE needs to change. The average volume on the Nasdaq must rise. It is great!! to see the NDX and SOX leading with the IBD 100 and IBD 85-85 but until a TON of volume returns, via the form of all that cash being raised on the sidelines by mutual funds of top quality fund managers, I will remain a cautious bull. Do you understand that!? A CAUTIOUS BULL. NOT A RIP-ROARING BULL. BUT A CAUTIOUS BULL.

I am very long but still have plenty of cash to work with for potential PERFECT charts to setup the next few weeks to months but until this happens I figure it is best to not get too carried away and too excited about the prospects of a decent uptrend developing. Things are starting to look better but until some of my personal best looking charts start putting in stronger price performances and more stocks that look like that show up, I am afraid it is still nothing more than a REALLY NICE bear market bounce.

This market must prove to me it is anything else. The only way it will be able to do that is volume. Great luck out there and I will see you in the chat room where we NEVER give up. ALOHA and pray for surf!

Just a reminder for the newbies:

IBD’s 20 Rules For Investment Succes

These rules aren’t based on our personal opinion or those of Wall Street’s experts. IBD built detailed models of all the most successful stocks every year from 1880 to 2005. We analyzed their common characteristics, what factors existed before these very best companies had huge advances and how these factors changed when the stocks topped. So these rules represent how the market actually works. If you ignore them and rely instead on personal opinions, feelings or emotions, you are potentially arguing with how the market has functioned for 120+ years and you will likely make more costly mistakes.

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