Stocks Finally Provide The Confirmation To The March 21st Follow-Through; Nasdaq Leads Market Higher, On Higher Volume

April 3, 2007

Possible good news out of Iran over the release of the 15 hostages, oil prices falling 2% to $64.64 as the result of the possible release, positive foreign market gains in Europe and Asia, and positive news from the housing market was just what the market needed, as stocks gapped higher, held the gains, and rallied into the close to close near their HOD.

When it was all over, the Nasdaq led the way with a 1.2% gain, the DJIA rallied 1%, the SP 500 and SP 600 gained .9%, and the NYSE rallied .8%. The Nasdaq, DJIA, and SP 500 all regained their 50 day moving averages, adding more positive news to the gains. The one questionable index was the IBD 100. Leading stocks came in with only a 1% gain, underperforming the Nasdq. Like I keep telling you, in the most powerful “real” bull market rallies, this index outperformes the whole market to the upside and underperforms the market to the downside. We still are not seeing a huge bullish divergence in this index, leaving questions about this rally.

Volume was higher on both exchanges, with volume rising 15% on the Nasdaq and 4% on the NYSE. However, the higher volume may be an accumulation day but it is not a “real” accumulation day. Why? There was no real volume. Volume was still below the 50 day volume average, showing that the big funds still have no interest in accumulating stock here. This is the retail crowd, mixed with a bit of dip buying and short squeezing. Though the gains are good, we should not be confused that this is a great market. It is not.

It is also important to compare the retail crowd buying in comparison to the real institutional buying. If we look at the accumulation/distribution of the indexes you can get a more clear picture of the overall volume structure. The SP 500 still has a D+, clearly showing sellers are showing up on the down days and buyers are absent on the up days. The NYSE carries a C+, the DJIA carries a D+, and the Nasdaq is the best with a B-. Yet, with the better rating on the Nasdaq, the big-caps are still outperforming this index since November. This shows you that the big-caps are seeing distribution as they rise and the Nasdaq is not seeing distribution as it falls. This might be confusing to some but, trust me, this isn’t that difficult to understand.

Breadth was positive, today, on both exchanges. Advancers beat decliners by a 3-to-1 margin on the NYSE and by a 2-to-1 margin on the Nasdaq. The most impressive number came via the 52-week new highs. There were 495 new highs to 61 new lows. But on the NYSE, there were 290 new highs and only 10 new lows (five were closed-end funds). So this breadth clearly shows that even though this market may not have a ton of quality leading it, there is still a lot of leadership out there. The put/call ratio finally fell below 1 again, closing at .95. However, this index still clearly shows the crowd too bearish. That is why we keep going up. Too many people are for sure we are going down and the market does the opposite of what everyone thinks.

Overall, today, was a very positive day. However, without volume over the 50 day volume average on the index and with no CANSLIM quality longs showing up again, it is hard to get excited over today’s action. To me, it appears, to just be a typical bullish low-volume push-the-momentum-stocks-around kind of market. With only two trading days left this weekend, I am sure there is more gunning the bulls could do to give the shorts a typical short squeeze beating. This tape reinforces the old saying that you should never short a dull tape. Unless you have volume on the sell-offs, you are always in a position to have a short squeeze attempt to destroy you.

Overall, since February 27th, we are still in a trading range. Therefore, anything that happens between the Feb 27 highs and the March 14 lows is just noise. This market is still range bound and since we have a short week I want to remind everyone that you should not take too much away from today’s action–much less the rest of the week’s action. However, within this trading range, we are sitting on a follow-through attempt that has now seen a bit of a follow-through. So we have to keep a neutral to bullish bias. The bearish bias can remain but the facts say that we have to respect the trend. That trend is sideways to up and nothing else, right now. Just don’t fall in love with this market. It very well could rollover, if we keep getting these low volume rallies. Remember, all it would take is a few days of heavy distribution to completely wreck this rally. So stay on your toes and try to stay unbiased.

If you have kept your bearish bias the entire time (which is fine) but you did not leave your emotions at home and have decided to not go long any of the great stocks I have given you since February 27th, you have to be feeling a bit humbled. This shows why panicking NEVER works. Many stocks that did not sell-off on lower volume during the pullback should NEVER have been sold by traders. Yet after a little bit of selling, almost everyone threw the baby out with the bathwater. Not me. That is why I am long a lot of small cap stocks that are making big gains and even with 60% of the account invested my account is hitting new highs AGAIN.

There has been plenty of action in small-cap stocks since February 27th and stocks like CLRT CIMT JSDA SLP LMRA TTG VDSI FALC SNCI JAX show why you should always play what the market gives you, no matter what your opinion on the market is. If the market gives you a perfect smooth chart setup, with max green BOP, TONS of accumulation, low volume pullbacks, and good fundamentals, you take it, no matter what!! I never pass on a green chart, no matter what. The only question is how much do I take? That depends on the market. Bullish markets constitute you buy more. Downtrending markets mean you buy less.

Enjoy the rest of this relaxing week. After the long weekend we will be coming back to the start of earnings season–which officially kicks off April 10 with AA reporting. Keep in mind, expectations for EPS YOY results is for a 3.7% gain. That is down from 8.7%, earlier this year. Don’t you find that a bit scary how far they have come down???? Also, the expected 3.7% YOY gain will be the first gain in 14 quarters of non-double digit growth. As earnings go, so goes the market. Also positive pre-announcements are running 20-40% lower compared to any quarter the past four quarters. This along with GDP growth slowing, as I keep saying, is the best leading indicator for the stock market. The GDP and EPS growth is slowing. Is the stock market next? According to history, it is supposed to be.

We will see what the next two days bring us. Aloha and I will see you in the chat room!

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