Stocks Refuse To Follow-Through On Yesterday’s Gains.

January 5, 2007

Despite strong job numbers that on the surface appear to be bullish for stocks, major market indexes sold off failing to capitalize on yesterday’s impressive performance. Rising hourly earnings and fear of the Fed not cutting rates due to the strong hourly numbers was the spark that lit the fire of the sellers.

At the close, the Nasdaq lost .8%, the DJIA lost .7%, and the SP 500 lost .6%. The bad news comes from two fronts: the SP 600 lost 1.5% and the IBD 100 fell 1.1%. Growth stocks and leading stocks stunk up the joint, today. The action in leading stocks shows that the market is weaker than the big cap indexes are telling us it is.

Volume ticked lower on both the NYSE and the Nasdaq appearing to brunt the damage of the selling. However, the refusal to follow through on the powerful gains yesterday after that crazy day on Wednesday tells me something is not right and that the market is weaker than the non-distribution day that it had today is telling us.

Here is a hint of that weakness. Breadth was negative on both the NYSE and the Nasdaq by around a 3-to-1 margin. That is a very weak day considering all the indexes were not down 1% or more.

For the week, the Nasdaq gained .8%, the DJIA fell .5%, the SP 500 fell .6%, and the SP 600 showed the real weakness underneath the market falling 1.6%.

There is no doubt this was a crazy week. Following the big intraday gains on Wednesday, stocks quickly reversed making one big round trip into the red. That looked UGLY as can be until the last hour when stocks were bid up all the way to the close. A very crazy day.

It then only got more crazy on Thursday as the buying continued and stocks roared ahead with strong gains, making the Wednesday session looking like a strong shakeout.

Enter today. The indexes gapped lower, moved even lower, but once again found support to drift into the close. It appears that every dip is being supported by the bulls. However, their powder is looking like it is drying up.

Why do I say that? Look at the SP 600. It finally cracked and broke down through the 50 dma. the NYSE, SP 500, DJIA, and the Nasdaq are right at those lines. If they don’t get above the Wednesday highs soon, it appears that they will join the SP 600 to the downside as breadth is getting very weak and I am getting way less high quality stocks on my scans.

The comfort to the possible selling comes via the big caps. Those indexes are still all in uptrends and even the Nasdaq 100 is holding the 50 dma after falling below it earlier in December. If big caps keep getting the bids and small caps keep selling, it will be obvious that this rally is in its late stages and that will have me start looking for weakness when they decide to stop rallying.

With all this caution, however, the facts must still be acted upon. The indexes are all still in uptrends in the long-term and intermediate term time frames. It is the sub-intermediate and short-term time frames that the indexes are either in sideways or downtrends. This is not enough time frames in the negative to start looking for shorts. Normally you want to see three time frames line up on your side (the bear side) if you want to start shorting.

Until the downtrend starts on the intermediate term, it is silly to start shorting in anticipation of falling prices. Stocks are still going up MUCH MORE than they are going down. The new buys are still working well. If they don’t they are being cut quickly avoiding much losses. Until 3 out of 4 longs I buy reverse on me after buying them, I must remain bullish. Most longs I continue to touch over $10 are still working out very well. Even the cheap ones are. They just fail more often. But when they don’t fail, they outperform unlike any other kind of stock.

Today was a very weak day and much weaker than the indexes tell. Today is the first day I am officially “worried” about this rally.

We will see what Monday brings us. Enjoy your weekend, rest well, and watch some NFL and college football games.

Aloha and I will see you on Monday.

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