Nasdaq (According to IBD) And NYSE Suffer Another Distribution Day; DJIA Leads Again

April 20, 2007

Stocks gapped lower on the back of weak Asian markets that saw the Shanghai, Hang Seng, and Nikkei indexes all lose over 1.7%. The delay in the GDP release in China was the cause of all the Asian selling. After the Asian markets closed, GDP was announced to have come in 11.1% higher in the most recent Chinese quarter. This caused inflation and rate hike worries that spilled over into our markets. However, showing that you can’t keep this market down, dip buyers stepped in again and bid stocks higher until after 1pm where the indexes finally calmed down keeping a lid on the gains for all the indexes but the DJIA.

Helping the market off the lows was some positive earnings reports and some economic data. NOK matched earnings but still lost 3.3%, EBAY sold off 3.7% after beating earnings and raising forecast, jobless claims fell 4k to 339k, the LEI was up .1% matching estimates, and Philly Fed Reserve mid-Atlantic manufacturing index rose .2 in April below estimates for a 3.0 rise. Crude oil also fell $1.30 to $61.83.

At the close, the DJIA led the way for the second straight day, hitting a new record, with a .04% gain. This was the sixth day in a row the index was up, this time thanks to INTC’s 2.2% gain. The other indexes closed lower, with the SP 500 losing .1%, the Nasdaq losing .2%, the NYSE losing .3%, and the SP 600 losing .4%. For the eighth day out of nine, the IBD 100 lead the indexes or kept pace with the worst index, losing 1%. Leading stocks are clearly lagging in this big cap rally.

Volume was higher on both the NYSE and the Nasdaq by around 1-2%. The higher volume along with the losses on the NYSE and Nasdaq give the indexes another distribution day. I was not going to call this a distribution day on the Nasdaq because the Nasdaq was not down .25% and it closed higher than where it opened. This makes it very hard for me to call it a distribution day. However, what do I know? IBD says it is, so it is. Therefore the Nasdaq now has 4 distribution days the past four weeks, the NYSE has 3 the past four weeks, and the SP 500 has two the past four weeks. If further weakness develops from here, this market could be in a bit of trouble.

The weakness the past few days are also apparent in the advance/decline line. Decliners beat advancers on the NYSE by a 5-to-3 margin and decliners beat advancers on the Nasdaq by a 2-to-1 margin. This is the third session in a row that decliners have beaten advancers despite some indexes hitting all-time highs. This shows a market being led by a select few big cap stocks. Healthy markets need broader breadth if they want to keep hitting highs.

Other signs of deterioration can be seen in the 52-week NH and NL numbers. There were only 276 new highs and there were 63 new lows on Thursday. The number of new highs shrinks every day. And if you look at a long-term trend of new highs since November, you can see that the trend of new highs is lower despite the market going higher.

Another nasty divergence showing up is in the Relative Strength line of the Nasdaq. If you look at the highs in November, you will see that each rally after a selloff brings the Nasdaq higher and higher. Now if you look at the RS line, you will see the opposite. As the Nasdaq hit a new high in January, the RS line lagged. When it hit a new high late February, the RS line lagged even more, and now with the Nasdaq hitting new highs again, the RS line is once again lower. Lower highs and lower lows in the RS and higher highs in the Nasdaq is a very negative divergence.

On top of that divergence is the negative divergence in the moneystream (proprietary indicator of tcnet). If you look at the peak in MS in February you can see now that even with the Nasdaq in higher ground (or around the same area) the MS line is well off the highs. Higher highs in price, with lower volume and negative divergences in the MS and RS line, is not bullish for the near future.

Some other potential bearish points (I am not doing this on purpose; this is what is flashing red in front of me) that I have to hit on is the amount of bulls out there: The MarketVane survey has bulls at 74% among futures traders. That is the highest level in over two years. The Investors Intelligence survey has seen bulls rise to 52.7%, near the bearish 55% level. The Arms index is also very overbought and Helene Meisler’s OB/OS Oscillator is very overbought also.

There are some positives out there that I should point out: the subprime loans did not lead to a selloff, there was no hedge fund blowup over the Yen carry trade, we still have a strong job market, the consumer is still spending, and earnings are still good. The clearly bullish sign that any selloff will not lead to an outright bear is the fact that the distribution days we are seeing right now are still happening on very low volume overall and prices are not plunging. It is hard to get real bearish off of .2% declines. That doesn’t have the feel of a bear market opening up.

The other clearly obvious theme is also the lack of complete sales in my portfolio. After today’s “distribution” day, I only had three stocks that needed to get the full boot. Considering that I am long 240 stocks (only 28 make up big positions), that has to be taken as bullish. Of the longs that I did sell partially out of today, most did not do any major damage on large volume; SMSI being the exception. But most sales were strictly disciplined selling decisions; ANO looks like it is in a semi-climax run so I took 20% off here with a 101% gain. This shows that if the market does selloff, a big bad crash is probably not coming any time soon.

The one key part of the overall picture I see is that the big caps and speculative solar chinese stocks are clear tell-tale signs that even if we do keep rallying and don’t selloff here we still have to be ready for this bull to end sometime soon. Big-caps ALWAYS lead at the end of a long-term bull market phase. This bull started in March 2003. Not last November, chumps.

GOOG is down 2% and AMD is down 6% and I just don’t care. Aloha and I will see you in the chat room tomorrow OR NOW!!

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