M&A Activity Keeps Stocks Hot As The DJIA Hits Another All-Time High; Higher Highs On Lower Volume

May 8, 2007

Stocks started the morning higher off another great day in China, with the Shanghai index up 2.2%, and on the news of a huge M&A announcement between two of the biggest aluminum giants and another merger in the defense arena.

Early on AA made a hostile takeover bid for AL. The $26.9 billion bid would make this the biggest merger ever in the aluminum arena and create a $54 billion behemoth. The other big merger involved AH being acquired by the British BAE Systems for $4.1 billion. The other talk was that ABN has also become a target of other suitors. obviously, the M&A rumor and deal mill are in full swing.

However, there was a tale of two markets today, as the DJIA continued to rally off the gap higher but the tech heavy Nasdaq sold off the rest of the day after the gap higher. This continues a theme of a strong big-cap market and a weak technology market, since November. This is clearly seen in the Relative Strength line of the Nasdaq. The RS line is putting in lower highs in January, February, April, and in May, while the Nasdaq keeps making 52-week highs.

At the close, the DJIA led the way with a .4% gain, the SP 500 and the NYSE followed with a .3% rally, the SP 600 gained .01%, and the Nasdaq really lagged with a .1% loss. The IBD 100 led for the fourth day in-a-row with a .5% gain. This sort of outperformance is nice but nothing to get too excited about.

Volume was lower on both exchanges by a significant margin, with volume lower by 24% on the Nasdaq and by 14% on the NYSE. This was the fourth day in-a-row of higher prices with lower volume on the NYSE.

It would be way more bullish to be seeing the opposite action in volume. Higher highs with higher volume means institutions are stepping over each other to buy stocks. This action of higher prices on lower volume is just repeating the pattern we have had since February’s selloff. We rally higher on lower volume just to have the big boys come in and dump on the market. Then the retail crowd does it all over again. This kind of action should be paid attention to as it is not the bullish for the markets in the long-term.

Breadth was pretty much like the market, with advancers beating decliners on the NYSE by a 6-to-5 margin and decliners beating advancers on the Nasdaq by an 8-to-7 margin. And back on the topic of negative divergences, new 52-week highs contracted again with the markets hitting all-time highs as there were 589 new highs to 49 new 52-week lows.

Well today was seriously about as exciting as watching paint dry. The only thing to really get worked up about, besides the negative divergences everywhere, is the DJIA’s continuous run. The DJIA is now up in 24 of the last 27 days and is one day away from setting a new all-time record. This is the longest run of gains since 1927! An 80-year record! This was also the indexes 20th day of hitting an all-time high this year and the fifth day in-a-row . Quite impressive of itself.

Overall, however, it was an uneventful day as traders are biding time ahead of the FOMC meeting on Wednesday. Economist expect the Fed to stand pat at the current rate but most investors will be looking at the wording that comes from the announcement so that they can gauge how the Fed feels about inflation.

Besides that we have the earnings announcement from CSCO on Tuesday night that will probably have a short-term impact on this market.

There is still nothing to worry about yet, with this market, despite the negative divergences that are showing up in the internals. Besides the negative divergences mentioned, the put/call ratio has fallen to .64, indicating that the crowd is getting complacent on the rally. But with no distribution in the market, there is nothing to act on with this number.

Everyone is looking for a pullback but no one is getting it. The bulls and the bears are all giving reasons why this market should pullback so it is no surprise the market has not yet pulled back with everyone looking for one. I am over looking for one. When one happens one will happen. Right now, with all the M&A activity and all the breakouts I keep finding, I just find it hard to expect a catastrophic selloff is going to happen. If you read any reader on realmoney.com, it is hard not to think a lot of trouble is around the corner.

Well, it could be, but for now and for current active investors who pay attention to the market everyday, all we need to do is follow the trend. And that trend is up right now. That is all I need to know. “Sell in May and go away.” I don’t think so. Not yet at least. There is still money to be made on the long side.

Aloha and I will see you in the chat room!

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