Russell 2000 and Nasdaq Leads Stocks Higher As The Market Produces A WEAK Follow-Through Day

August 30, 2007

Stocks started the day off on the right foot and kept climbing higher all day long as the Nasdaq closes at its HOD up an impressive 2.5% and the rest of the indexes close just ticks off the highs. There was no doubt that today was very bullish and good for stocks. The best index was the Russell 2000 with a 2.54% gain. And the best sector index was the Philadelphia Semi Index which put in a really strong 2.79% gain.

However, there was one major problem with today’s follow-through–well two really. The first and most important problem, imo, is that volume was ONLY 1% higher on the Nasdaq. This, along with the NYSE’s volume coming in 5% lower, is a clear sign that the smart money was not falling all over each other to load up on top stocks. In fact, volume continues to be well under the 50 day moving average and today’s volume was no different. For eight straight days, the big boys have been completely absent.

The second problem is that this rally attempt occurred on day 10 off the 8/16 lows. While history shows the best rallies start between day 4 and 10 after the follow-through, history also shows that rallies that start on day 4 do much better than rallies that start on day 10. Remember, we have to respect this follow through and look for longs, since no bull market has EVER started without one. However, just like in 2001, not all follow-through lead to a bull market. There were three failures that year.

Still, the odds of this rally lasting are improved with the put/call ratio being above and around the 1.00 are so often the past month and with the Investors Intelligence survey having the bulls come down to 40% and the bears move up to the 37% area. So the sentiment is bearish enough to get a good rally. All of this is possible, even though on the Nasdaq confirmed the rally.

Another thing to consider is that out of my 18 current shorts (only two are large positions), none of them gave a cut loss signal. All continue to hold below resistance and/or key moving averages. The rallies in most of them today came on lower volume, continuing to make them good shorts. Also the lack of powerful chart patterns out there is another red flag this one might not work.

If you find all of this analysis wishy-washy, then you obviously have never dealt with a market like this before. It is simply silly and not prudent to take sides here. Just yesterday, EVERYONE was sure we were now rolling over and could possibly see new lows. Now EVERYONE is saying that 8/16 was definitely the lows and nothing but higher prices are in store. I happen to think that we will just continue to do this dance. Some longs and some shorts will make money and some longs and some shorts are going to lose us money.

If the markets move higher, we have a few longs that are going to do real well and we will cut those shorts. If the market moves lower, we will cut those longs and ride our shorts lower as they have the kind of patterns that could make us a lot of money, if this market decides it has topped.

Today’s rally might be the cause of a possible Fed Fund rate cut. If that is the case, then it makes sense. All of the most powerful short-term rallies that occurred in 2001 came after every rate cut. However, they didn’t hold and it wasn’t until late 2002 that the market finally bottomed.

This continues to be a battle of extreme emotions of the bulls and the bears. The smart investors right now are on the sidelines with one foot on the bear side and one on the bull waiting for a clear signal to jump to one side or the other. For now, the right side, is no side. The only thing that will not change in this market, in the short-term, is change.

One more time: DON’T BE A BULL OR A BEAR HERE. Go with the flow and stay flexible. Don’t marry any stock right now and only push your bets on the long and short side if that chart is near perfect and you can see “gold in the corner.” There are a couple of charts out there that could do us very well. Just don’t bank on it yet. In the stock market, ANYTHING CAN HAPPEN. ANYTHING CAN HAPPEN.

Aloha and I will see you in the chat room!!! Surf is up and is getting really big. So if I am not in the chat room tomorrow, I apologize. I will be in there before the closing bell and if I do get in that late I will stay at my trading post for a long time after the bell to make up for the time away catching the BIG WAVES! Just like in the stock market. ALOHA!

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