Possible Stagflation?; Stocks Lose Ground On Higher Volume, Giving The Market Its Second Distribution Day

April 12, 2007

Stocks started the day weak on the back of data from the NAR announcing that they expected existing home sales to fall in 2007-the first drop in 38 yrs-and also see lower existing and new home sales in the short term. That combined with higher gas prices weighed on stocks early. But once again the dip buyers showed up and started to bid stocks higher. That was until the Fed March meeting minutes came out at 2pm. That promptly sent stocks to new lows on the day before they received a minor bid into the close.

The Fed minutes clearly signaled that more rate hikes are needed and that investors who thought the possibility of a rate-cut was coming were definitely doing a lot of wishful thinking. What I took away from the report was that the Fed is very confused by the current data, admitted to seeing lower growth in the economy, and they are worried about inflation. These ingredients, when mixed together, make a special dish that you definitely do not want to be served called stagflation. Let’s hope that isn’t the case. If it is, don’t think this Congress will do anything to help. Some parts of the world are about to get wealthy, while our dollar continues to sink. Too bad mom and pop do not understand economics.

To the reality of now, stocks closed lower across the board. The DJIA, Nasdaq, SP 500, and SP 600 all fell .7% and the NYSE fell .6%. The bad news in leading stock land was the fact that the IBD 100 fell .9%, well outpacing the broad market. The IBD 85-85 fell .7% but that isn’t very comforting since it did not outperform. This is the second day in a row the IBD 100 has lagged the broad market. That is not bullish.

Another thing that is not bullish was the leading sectors today. Oil&Gas and Steel stocks have been the best in this current rally but now look at what amazing leaders showed up today. Food-meat products, medical, and closed-end funds. These are not necessarily leaders but I have a lot of stocks in my scans showing up in these sectors. And I see via the IBD new-highs list that these are moving up there also. These signal a week market, not a bullish one. The top sectors this year are Utility, Defensive, and Medical sectors. This does not bode well for the market.

What else does not bode well? Volume. Volume was higher today, giving both indexes their second distribution day since the rally started. Volume was 18% higher on the NYSE and 8% higher on the Nassy. Today’s volume was higher than any of the up days in April. Besides being the highest volume, it was also the first time the Nasdaq has traded volume at least as heavy as the 50 day volume average since the follow-through. And now the Nasdaq is only up .14%, since the follow-through, hmmm. Does this feel like a powerful uptrend to you?

Decliners beat advancers by a 2-to-1 margin on both the Nasdaq and the NYSE, not showing the selling to be too intense. There were 309 new 52-week highs and 93 new 52-week lows. The new lows are expanding quite rapidly considering that some indexes were just at all-time high territory. This also has bearish indications. And the last bit of data for you is the put/call ratio. That ratio on equities is at .69, after today’s selling. This is bearish as it means that option players bought calls as the market fell. Traders feel every dip should be bought. I happen to differ with that assessment right now.

To me it is very funny that the notes from the Fed minutes in March caused today’s selloff. Wasn’t it just last month that after they left from this meeting that stocks gave us a follow-through day LESS THAN ONE MONTH after a major breakdown? So on that day it was ok but today it was not ok? If you are confused trust me you should be. This is why I follow charts and the CANSLIM system. I am not confused. I am for sure of one thing: All of their rhetoric is meaningless. It is all worthless. But as traders I guess we need something to talk about.

This sell-off after the past eight days of low volume rallying is just what I expected to happen eventually. The small itty-bitty price gains on volume below the 50 day volume average is just not bullish. No long-term powerful uptrend starts with such low volume. This rally was and is still very ugly. However, with only two distribution days it is no where time to start shorting. Heck, I am still long over 200 stocks. So we are no where close yet. However, the fact that all the indexes are up less than 1% since the follow-through and that we have two distribution days already should have traders more worried about the downside than hoping for more upside.

Of course, don’t think that I don’t know that the dip buyers are insane creatures and that the big boys may want stocks bid a bit higher to dump into. This small bout of selling could possibly set us up for another low volume rally that suckers in more of the dumb money who believes every dip should be bought. Eventually though, the day of reckoning, will be here and many traders who are buying the market for this first time AFTER FOUR YEARS of a strong bull market are going to get hurt bad.

I don’t know, everybody. If you ask me, investing or trading in this market using my growth strategy of getting big juicy gains in periods of weeks to months is not the right method right now. As you can see via my returns listed on my free market analysis section I am still doing very well. However, there is a lot of unnecessary churning in my account. I could eliminate this by avoiding going long some small-cap stocks. But I love nailing those winners when I do get them. They normally take care of all the small losers. But in this environment it is hit and miss.

The best play right now is to continue to invest long-term in the steel market or to be daytrading the solar, biotech, and stem cell stocks right now. STEM ASTM ASTI FSLR DNDN and many other stocks like these are offering very experienced investors chances to daytrade and make a lot of money. How many people can daytrade successfully? Less than 1 to 2%. It is much harder than the method I use. Can I daytrade. You better believe I can. It just isn’t my style. But if I was addicted to the stock market and not Maui, I would probably be daytrading right now with the 40% or so cash I have on hand.

On that note, I am checking out. I watched an amazing hockey game tonight where the most shots on goal EVER was produced. The Dallas Stars unloaded 76 shots on Roberto Luongo in his first NHL playoff game. The Vancouver Canucks won and Roberto was the hero. It was a great game that lasted over 5 and 1/2 hours. So obviously I am tired from just watching the game. Aloha and I will see you in the chat room.

Sidenote: If you are a Gold Member, make sure you read yesterday’s chat archives. There were some great topics discussed.

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