The Bad News From The Housing Sector Just Doesn’t Stop; Stocks End Lower But On Lower Volume

March 27, 2007

It was a day of bad news all around, as rising oil prices, more bad news from the housing market, and a drop in consumer confidence rocked stocks early. After the early morning rock, stocks basically spent the rest of the day boring everyone as all of the action was before the bell.

Before the bell, the Conference Board consumer confidence index fell to 107.2 in March, from a downward revised 111.2 in February. This was the first decline in five month and below estimates, after the index hit a 5 1/2 year high in February. Then we had the bad news from LEN’s Q1 report. The stock said this quarter EPS came in 72% lower and withdrew 2007 earnings estimates. The combination of these two news events, with oil making gains helped send all stock indexes lower. The bad news continued, after-hours, for the homebuilders, but we will get to that later.

At the close, the Nasdaq and SP 600 led to the downside with .7% declines, the SP 500, the DJIA and NYSE lost .6%, and the SP 400 held up the best with only a .5% loss. Leading stocks kept pace with the market, with the IBD 100 falling .7%. Even with the leading stocks keeping pace with the Nassy to the downside, there still was virtually no selling in the stocks that make up this current index.

Volume was lower yesterday on the NYSE by about 5% and lower on the Nasdaq by 2% or so. The lower prices with lower volume shows that the big boys still are not dumping their holdings. In fact, the light volume on this pullback, on top of all of today’s negative news headlines, is a very bullish situation. Combine today’s action with yesterday’s reversal and it is hard to believe the bulls are done with the upside. You simply do not see this kind of light volume pullbacks in a true bear market.

Breadth was negative on both stock exchanges today. Decliners beat advancers by a 2-to-1 ratio on the Nasdaq and by a 9-to-4 ratio on the NYSE. There were 183 new highs to 64 new lows. There is nothing, underneath the market, that is signaling the market is ready to fall.

Some of the highlights today that have to be mentioned revolve around the housing sector. The IBD Building-Residential fell 1.8% and the IBD Building-A/C & Heating fell 2.2%, giving these indexes yet one more day of ugliness. The overall Philly Housing sector fell 1.5% today. It seems the pain never ends for these stocks. And by that I mean…the pain never ends. After the bell, there was even more bad news, as the FBI has started an investigation into the lending practices of BZH. The number of bad loans on their books is much higher than the national average. This sent the stock down as much as 15% after-hours. Not good.

So, basically, nothing has changed. The market is still in the same position as it has been in since the follow-through day last Wednesday. We are going nowhere, either up or down. A lot of traders are not sure if this is positive. Truth be told, I don’t know either. But what I do know is history. And IBD has hit the nail on the head again today by giving us another history lesson on follow-through days.

Even though we have not had another powerful day of gains in the market since the follow through day (the best bull markets have immediate gains), we still have not had any distribution days within the first five days. That bodes well for at least a possibility of higher prices. While no great bull market has ever started without more powerful gains on heavier volume right after a follow-through day, a follow-through day that does not have any distribution days within the next five days (like we just finished today) has a much lower chance of failing than other rallies. So basically what this tells me is that we need to be ready for more choppy trading.

If we do not sell-off here and instead keep rallying, you can guarantee, that the indexes will make slow steady (or slow and choppy) gains that will limiit my and your chance to make a TON of money. Like I keep saying, a bull market here is not that great of news. The gains here, with the low VIX, guarantees us that we will probably find ZERO stocks making 500% moves in six months. Even if there is one or two, trying to pick that one out of 8000 stocks is damn near impossible.

The chances of us going higher increases also with me finding this little gem from the Merrill Lynch Corporate Indicator. The net short position of hedge funds in the Russell 2000 is at record levels. The majority of these investment funds are not only too complicated for 99.9% of investors (nobody needs to be in anything where they do more than buy and sell stocks) but they are also ran by complete morons. Trust me, I have met my fair share of these people. Do you think they just focus on price, volume, cutting losses, money management, and studying and trying to find the greatest stock market winners? NO! They are too busy trying to let you know how smart they are. This is why the total pool of hedge funds do much worse than mutual funds. I still am shocked that people invest in these things.

On the other hand, portfolio managers cash balance has increased from 4.4% to 3.8%, signaling that they are more cautious now than they were in February before the sell-off. Along with that there risk appetite for stocks fell to five-year lows. This shows that even these guys, like me, feel cautious here. However, just like me (I am long 193 stocks), they are still long and are not selling off their stocks. That is why cash levels is not around 10% or more. These guys still love the stocks they are holding. Just like I do. Why do we like them? They are going up. That is all I want the stupid stock to do.

And on top of all of this information is the fact that the put/call ratio has jumped back up over 1 and closed at 1.1. This along with those hedge-fund douche bags shows that the market is going to have a hard time going down, with all of these short sellers. The market likes to reward the contrarians. The contrarian play right now is to be long, according to the put/call ratio and hedge fund investments in the Russell 2000.

But, just to confuse you and me some more, the overbought/oversold indicators that I follow have all of them now in overbought territory. The only way to work off the overbought condition is to either go sideways or lower. So expect some of that action. Based on the futures it appears we will be going lower again tomorrow. However, unless volume picks up and we get some clear distribution there will be nothing to worry about, much to my chagrin.

But, it doesn’t really matter. I am still long 190 plus stocks that are all putting in solid gains so I guess I should just be happy with the current gains. The gains I am seeing I am sure many people would die to be producing. So I guess I am just crying over spilled milk. But I love being able to hit home runs left and right. I do not like being a high OBP kind of guy. Because even when I can hit home runs the OBP is still high anyways. It all comes down to the damn VIX. And that can’t jump until we get a real sell-off.

I have ranted enough tonigh. If you are not making money in this market, I need you to please go and review all the longs I have taken since February 27. Why am I up 7% this year in my personal account, if this has been such an ugly market. Should I be up more? HELL YEAH!!!! Everybody should be with a flat market, if you are a CANSLIM trader. But this market, right now, is not rewarding growth investors or momentum investors, unless you concentrate solely on the solar stocks. Still go review my longs. You will see all are up or still have not violated the stated cut loss area. That is bullish, not bearish. I don’t know when I will get my bear market, but as each day goes by without a sell-off, the more and more I doubt it is time for a bear market. I will just have to keep waiting for real euphoria I guess. It makes me wonder if it is all going to end with a big-bang like the final run-up in 2000. By “it is all” I mean the bubble in China’s equity market which is what is holding this whole charade up. Like I keep saying, the chart of the China stock market is the same two year chart that preceded the sell-off in the 1929 DJIA and the 2000 Nasdaq.

Aloha and I will see you in the chat room.

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