Stocks Reverse Intraday Losses, With Most Indexes Closing Higher On A Slight Uptick In Volume; Housing Market Continues To Swoon

March 26, 2007

Stocks started the day pretty drift-less the first half hour, but soon the excitement started. After a report on new-homes sales falling 3.9% to 848k in February to new seven year lows (June 2000), a report on the months supply of homes on the market rising to 8.1 months which is a 16 yr high (January 1991), and a revision of new-home sales being lowered in November, December, and January, stocks were slammed. On top of that, Citigroup announced plans to cut 15k jobs and take a $1 billion charge to earnings, and oil rose to over $63 a barrel, closing at $63.30. Despite all of this, after the selling was over in the morning, stocks rose the rest of the day closing near their highs. This was a very positive bullish intraday reversal.

When it was all over, the Nasdaq reversed a .9% loss to close .3% higher. The SP 500 and DJIA closed higher by .1%, the NYSE ticked a few points higher basically closing flat, and the SP 400 and SP 600 diverged closing lower by .05% and .15% respectively. The Nasdaq 100 gained .5%, leading the broad market. The IBD 85-85 index closed higher by .02%, failing to keep ahead of the Nasdaq but still keeping pace ahead of the overall market since the March 14 lows.

Volume was slightly higher on both the NYSE and the Nasdaq. Volume came in around 10% higher on the NYSE and 5% higher on the Nasdaq. Heavier volume, with today’s reversal is bullish for the short-term but the fact that volume is still well under the 50 day volume moving average shows that funds are not stepping all over each other in a bid to buy stocks. The trend of lower volume rallies continues.

Breadth was slightly negative on the NYSE, with decliners beating advancers by a 16.7-to-16.1 margin. Advancers beat decliners, on the Nasdaq, by a 4-to-3 margin. New highs came in at 302 compared to 55 new lows. The problem with this figure is the negative divergence in new highs compared to where they were when we were at this point before Feb 27. The new highs now, with us near the old highs, is much lower. And the new lows are much higher than where they were when we were at this point before the Feb 27 sell-off.

Today’s reversal, like I said earlier, was very bullish in the short-term. However, when we step back and look at things overall, it still looks like buyers are just looking to bargain-hunt here and/or shorts are covering because their stocks are going against them or are not falling lower. This intraday reversal today was very similar to the ones seen after the March 14 lows. They even look the same, with the low volume. The market may be near the highs but with the low volume rallies after the large volume sell-offs, this continues to look like a short-squeeze rally from a very oversold market.

The extreme negativity after the February sell-off appears to be cooling somewhat, after the month of gains we have seen. The put/call ratio which has been near the moon has finally come in some, closing today at .89. This shows that all the fear that was in this market very quickly is starting to make its way back out. The higher price gains after this dip has convinced many small retail players that every bounce has to be bought.

I believe this is the last bounce before a failure. Could I be wrong? Damn straight. But if I am wrong, do you think I will not be buying even more stocks that break out of HOT pretty green charts? Exactly. But where were all of these part-time players in 2003, 2004, or 2005? They only started to show up in 2006. Since the dumb-money is getting so adamant that stocks have to rise, we are probably not looking at a lot of big gains in the intermediate time frame.

If you don’t believe me that something is wrong with this rally, why don’t you take a look at the top two indexes this year: the DJ Utility index and the Medical/Healthcare index. The DJ Utility group is up 10% this year, well outpacing the other averages. The IBD Medical/Healthcare index is the second best index YTD, with a 9% gain. Therefore, it is clear to see that the defensive stocks are leading this market. This could be a foreteller of bad things to come in the market, as defensive issues are not what the best bull markets enjoy as top stocks.

And just take a look at the top stocks today. They came from the OLD leaders. Oil & Gas-Int had 50% of its IBD industry components hit new 52-week highs, and tons of Metal groups made 1% gains or more. Some old leaders are getting hit. The Transportation stocks got hit across the board today and the Housing index fell 1.1% leading the indexes to the downside.

The old leaders and defensive stocks do not mix-up to make a great bull market. Therefore, I find it hard to believe that we can continue to rally with these as leaders. However, as long as the trend is up, like it is now, that is where I will be. Still, however, without a lot of fresh breakouts from long clean bases it is just too hard for me to be like everyone else and embrace higher gains. There are too many flaws in individual charts to think otherwise. There are also NO new fresh leadership showing up. Normally, during a NORMAL pullback, you get some industry groups climbing the list with many stocks setting up ready to breakout from HOT patterns. Where are they?

There are some nice stocks breaking out. But most of these breakouts still have some flaws in them. Nothing is perfect. Normally, when a fresh bull starts, you will have perfect charts out there like TESOF. Yes, TESOF, is one. But normally you have MANY MANY others with the same chart pattern acting the same way. If you have been following my longs, you will know that I am doing VERY VERY WELL since February 27. However, almost all of these have had something or another slightly wrong with them. This simply does not happen in a market that is about ready to run to new highs.

There are still a lot of problems out there that DID NOT exist during the past four plus years. Margin debt for purchasing stocks is at all-time highs (over the March 2000 top levels), the housing market bubble is popping, the subprime market has gone into meltdown with its effects spilling over into the economy, inflation is still rising despite a slowing economy, GDP numbers are being revised down (they were being revised up every quarter until the most recent quarter), and the consumer’s wallets are tightening up as you can see retail sales finally starting to plummet. This is all part of the reason, along with my charts, why I remain VERY doubtful that any meaningful run can happen. Even if we do get a run, you must understand, this low VIX guarantees you will NOT MAKE A KILLING OR GET FILTHY RICH. So for those of you who want this market to keep going up, you are insanely NUTS!! We need a big pullback before we can EVER think of hitting 500% gainers in six months or less on a consistent safe basis.

The bulls are still in complete control but unless a ton of volume starts hitting this market on the upside I have to wonder how much longer this can last. Remember, during the 2006 bottom, I was one of a very few market analyst that said to buy stocks and that the market was going higher. This time the market is going higher, but unlike last time I don’t trust this rally AT ALL. The last rally SUCKED, don’t get me wrong. But this one is 100x worse. I still expect heavier volume selling to return, when the retail bulls are done with their bargain-hunting. The catalyst for that is earnings season. That starts unofficially on April 10 when AA reports. Numbers are already low but if they come in lower than expected already you could argue that might be the straw that breaks the camels back.

But until that back is broken, we must keep buying the few HOT green charts that do setup. So I will stick with the current game plan but keep my guard up. It was a very slow day today and I hope it is more exciting tomorrow and the rest of the week. Days like today are hard to sit through.

Aloha and I will see you in the chat room.

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