Stocks Reverse Ugly First-Hour Selloff, As Leading & Small Cap Stocks Lead The Way; Bulls Are In Full Control

February 20, 2007

Early losses soon turned into gains, after a long three-day weekend, as investors bid stocks up on the back of plenty of good news. News of a deal between SIRI and XMSR, VMC acquiring FRK, Oil dropping 2.2%, and positive comments from Fed gov. Susan Blies was just what the market wanted to hear, as stocks closed at all-time and multi-year highs.

At the close, the SP 600 led the way, hitting all-time highs, with a .9% gain, the Nasdaq turned a .7% morning loss into a gain of .7%, clearing the 2500 level and closing at six-year highs, the SP 500 finished with a .3% gain, the DJIA finished .02% higher, and the NYSE lagged, thanks to being oil and gold heavy, with a .02% loss. Great news from leading stocks, however, was the headline today. The IBD 100 finished with a 1.5% gain, well outpacing the overall market. 30 out of the 100 members scored gains of 2% or more.

The only really ugly sector out there today was in the Philadelphia Gold & Silver index. That index fell a large 1.8%. Old leaders don’t lead new bull markets. Gold was last year’s play.

Volume was much higher on the Nasdaq and well over the 50 day volume average. That is clear accumulation, as the index breaks out to new highs. The NYSE had volume come in slightly lower than Friday’s level. Breadth was positive, overall, with advancers beating decliners by a 5-to-3 margin.

Today was another day of great action, with the small-caps, leaders, and technology issues all making significant gains. Top stocks and almost all of my stocks that I am long (that is a lot of stocks) acted perfectly today and many that sold off put in extremely positive intraday reversals. That is without a doubt a positive development, after this mornings selling. Only having two complete sales (one which was a long on Friday) shows exactly how strong this market is. When you have only two sales out of 270 great longs and you have many new longs show up and stocks giving you additional buy points, you know you are on the right side.

I am still seeing a lot of extended stocks and stocks going into climax runs (LFL SBGI ACY CYTR JADE TRA TNH ICE SPAR) and couple that with the fact that I am still thin with CANSLIM quality stocks and you have to think that a short-term pullback has to be in the cards some time soon. However, with Mr. Momentum clearly in town, that is not happening. I am not sure if this action in these stocks are just an omen in these sectors that the run is over soon for some of these stocks and not others; or if there is something worse coming. But for now the trend is up and fighting that trend is just not something that is smart to do right now.

A pullback might setup some very nice basing patterns for the leading stocks to break out of. However, right now, all I am getting are speculative issues that are doing very well. You would think that is a good thing; however, the biggest and most consistent gains are coming in the stocks I am already long. The new longs right now are just speculative and have a higher chance of failing. But they also have higher chances of giving some rewarding gains. Knowing your risk tolerance is the most important thing to know, when you are dealing with non-CANSLIM quality stocks. But overall there are very few AYR CROX and HLYS type of stocks out there.

Another troubling thing I can’t shake is the pure momentum favorites daytraders are successfully playing. Hearing these annoying investors get cocky is something that always throws up caution flags. However, by judging the put/call right near 1 all day long, it is obvious most traders are still betting on a decline. This put/call simply can not move away from the 1 area, which is bullish as a contrarian play. So why do we see the hot money doing so well right now in solar stocks?

That is because many daytraders are trading them and trying to short every rally. These stocks have HUGE EPS and sales growth and as long as traders try shorting these runaway trains this momentum has no reason to stop. So even though traders may sound bullish and that they are daytrading solar stocks to financial freedom, the facts say that they are trying to short every uptick. That is why we can’t go down. Mr. Momentum is in complete control.

However, this kind of runaway bull market is giving many “sell into strength” signals. Many shorter-term to intermediate term climax runs and new highs on low volume are offering me many excellent opportunities to sell stocks near their highs. Take TATTF, for example. On Friday I sold off 25%. My first sell, since going long. It was a perfect example of a stock that has gone too far too fast and late in the uptrend was making new highs on low volume–a clear sell signal. Today it sells off 10%. Beautiful. Other examples are in stocks like ACY. This is a sell signal. Not a buy signal.

Oh man. This is a great market making me great money. I hope everyone else is enjoying these gains. I will enjoy them while I can. I am sure this party will end. And when it does end, since we have not had a 2% decline in over seven months…I am sure it will end pretty ugly. Bull markets that run and run and run, without normal pullbacks, never end well.

Until that trend changes, stay with this mighty mighty strong trend. Tomorrow, we have CPI data. That is sure to be good enough to give market talking heads plenty to discuss and pontificate over. Aloha and I will see you in the chat room.

Posted by Joshua Hayes | Filed Under Market Commentary