Shorts Keep Getting Squeezed; Big Caps, Semiconductors, And Leading Stocks Work Their Magic

July 5, 2007

Stocks countered an overnight selloff in Asia by producing some solid gains off the mid day lows. At the closing bell, the Nasdaq led the way with a .4% gain, closing near the HOD. The IBD 100 led the market with a .7% gain and the SOX (Semi Index) and Nasdaq 100 were up .8%, showing that big-cap tech and leading stocks are where the momentum is at.

Volume was higher than the half-day levels but was lower than the last full day of trading on Monday. So today’s gains were not that impressive, other than we still got more gains. But it never pays to be short a dull holiday shortened week. Despite the gains, breadth was negative on both the NYSE and the Nasdaq. It was 9-to-7 negative on the NYSE and 8-to-7 negative on the Nasdaq.

The poor breadth also came with only 406 stocks making new highs. This continues the trend, since early June, of the Nasdaq making higher highs while new 52-week highs come in lower and lower. Also looking at the cumulative volume of the Nasdaq (up volume compared to down volume on an intraday basis) it is clearly showing a negative divergence by not hitting a new high with price. This shows that momentum is slowing and a pullback should be expected sooner rather than later. I still wouldn’t worry about the pullback being anything significant.

Why? Because look at the market! Private equity deals just don’t stop, with BX buying HLT, helping the rest of the hotel stocks, like HOT, make significant gains. HUN also got a higher bid over the previous bidder, and KO wants to buy the Snapple and Motts brands from CSG. You just don’t see this in a market that is about to rollover.

The charts clearly show that they want to make more gains. Some big-cap tech stocks are starting to look a little parabolic on monthly and quarterly time frames (AAPL and RIMM). But still if you compare those charts to the tech charts of stocks like QCOM and JDSU, you will see that we are nowhere near those extreme levels. If you also look at some other leaders of this market like GOOG, you should clearly see that there appears to be much more room to go on the upside before that chart looks parabolic.

So until I see these charts in extreme parabolic moves, like the chemical-fertilizer stocks, I just don’t think we need to be looking for a top. Take that with all the shorts in the market (NYSE short interest still near all-time highs) and the lack of extreme 3-for-1 and back-to-back 2-for-1 splits and it just seems safe to say that we have more gains yet to come for our longs in our portfolios.

Yes, some charts are looking a bit taxed, but as long as they are above the 50 day moving average, leading stocks are leading the market, and stocks like LOCM continue to decimate the shorts, I think it is safe to say it is wise to be strong and long here. This does not go with the caveat of a short-term pullback being in the cards. The put/call ratio took a bit of a tumble today to the .62 level. It seems the crowd has finally become complacent with the gains and some call buyers want to finally participate. The market might want to humble these always-late-to-the-party call buyers.

As long as your charts are green and moving higher, there is no reason to do anything but sit on those gains. Aloha and I will see you in the chat room, where we will close out this short holiday fun-filled week.

Subscribe To Site: