This Was Posted Saturday On The Daily Stock Market Analysis

June 11, 2007

Stocks Bounce Back From Thursdayâ€™s Selloff On Lower Volume; Indexes Still Holding Their 50 Day Moving Average
By MauiTrader

Stocks rebounded nicely from Thursdayâ€™s selloff, on the back of the trade deficit shrinking in April by 6.2% to $58.5 billion and oil falling 3% to $64.76, on lower volume. At the close the Nasdaq led the way higher by 1.3%, the DJIA followed with a 1.2% gain, and the NYSE, SP 500, and SP 600 came in with 1.1% gains. Leading stocks couldnâ€™t quite do as well as the broad market, with the IBD 100 only gaining 1.1%, after yesterdayâ€™s 2.8% chop. The top index of the day, however, was the Philadelphia Semiconductor index. The SOX rallied 3.1% off the back of a huge rally in shares of NSM. This made it the eleventh Friday in a row that stocks have decided to finish higher. I wonder when the last time was that that happened.

Todayâ€™s rally looked wonderful on the outside. However, on the inside, there were some minor problems. While it was good to see a bounce right after the past three days of distribution, right at the 50 dma, it was not good that volume came in 19% lower on the Nasdaq and 18% lower on the NYSE. This is the opposite of what you would like to see from the big institutional investors. You want to see higher volume come in to support stocks after such a selloff. We did not get that, obviously. And that has to be taken as a caution flag, despite the indexes holding the 50 dma. To me it means, if your longs are holding keep holding. But if you are looking to buy, I would hold off, until I saw some volume come in to the market on the upside.

There were some good internals via the form of 71 out of 197 industry groups putting in 1% gains or more and there were two advancers for every decliner on the Nasdaq and there were a little more than two advancers to every decliner on the NYSE but there is one internal that really stands out: new highs and new lows.

On Thursday, we saw the amount of new 52-week lows eclipse the amount of new 52-week highs, after a heavy down day. But after Fridayâ€™s gains, the numbers still stayed very negative. There were only 75 new 52-week highs compared to a whopping 132 new 52-week lows. Like I said yesterday, on the short-term that is not a big deal as the market can be led by a few select big caps. But these numbers getting so negative with the indexes near the highs is a clear signal to me that when this market does finally decide to rollover it is going to get ugly fast. The market is basically telling us that it is extremely weak up here and that only a few stocks are leading it higher.

For the week, the SP 600 led the indexes to the downside with a 2.8% chop, the NYSE fell 2.2%, the SP 500 lost 1.9%, the DJIA lost 1.8%, and the Nasdaq lost 1.5% holding up the best amongst all the selling. The IBD 100 fell 2.2% for the week but it was still very positive to not see this leading index lead the broad market lower. At least it is only keeping pace with the small cap index.

Inflation, falling bond prices, and rising oil were all the many contributors to the falling indexes. Or at least this is what I was told was the reason. God knows they will never tell the truth and just say â€œthe big boys are selling more than they are buying and with the selling coming on higher volume they are obviously distributing on the retail crowd.â€ You will never hear that. Instead you get the usual stories on inflation and bonds that try to explain the action. Bottom line: the rally is under pressure but the indexes are still holding the 50 dma so there is really nothing to freak out about yet. You can leave that to the folks at CNBC.

However, thanks to some in the media suggesting an all out crash, I see a lot of traders jumping on the bandwagon calling for this recent action to mark the top. Signs of that was already appearing in the crowd with the NYSE short interest ratio recently hitting 5-year highs and the put/call ratio still topping the 1 are with a 1.04 close on Friday. So it is obvious that players are making large bets against this market, despite it being only around 3% off the all-time highs. This could be because of how long this uptrend has lasted but that is still a poor reason to go short stocks.

The other action on Thursday, that to me, looked like short term capitulation, was that the NYSE had declining stocks over advancing stocks of near 11-to-1 and that 94% of all the NYSE volume was down on the downside. This just feels like a very extreme amount of selling on a down day and has a feeling of a severe washout. This does not write it in stone that it was but when you compare this extreme selling combined with the bearish bets of the crowd you can pretty much assume the short side is probably not the right side to be on now despite the losses on Thursday.

This doesnâ€™t mean go run out and buy every stock that dipped. Quite the contrary, you should never do that. You should only buy the best stocks that hold up during selloffs that then breakout in a bullish uptrend. Right now, in this market, until you see the market work its way to new highs, I would keep new longs small and only to high quality merchandise with strong EPS and sales growth. That way if the seven distribution days on the Nasdaq do rollover this market, you will avoid getting crushed by buying the â€œbargainsâ€ which happen to have a unique ability to become bigger â€œbargainsâ€ when the market is moving lower. However, if you are still long stocks with no signs of selling and your charts are green green green, well then you know you stay long.

Very few of my top stocks and very few of my speculative stocks are showing any signs of significant selling pressure or topping signals. Instead most are above their important 50 dma, just like the indexes, and are still in solid uptrends and/or holding very key support price areas. The ones that have blown through their support are always disappointing but you are bound to have those in any market environment. At least, in this one, you can sell your laggards and have an opportunity to find other better quality issues that continue to uptrend in the choppy waters that the market has brought the past week.

It wouldnâ€™t surprise me if the market took right back off to new-highs, after the Thursday pullback. But chances are probably higher for a more choppy market environment with us being in a lower volume summer environment. There are a lot of very bullish and a lot of very bearish traders out there. This will surely cause a battle ground that will keep prices range-bound even if they have some follow through one way or the other. Some are out there wanting to short every uptick (a stupid way to invest) and some are out there wanting to buy every dip (another stupid way to invest) which is surely going to make things fun in the short-term.

Still it hasnâ€™t been smart to bet against this market since March 2003 as this trend just keeps moving higher. Yes, there have been downtrends during each year, since then, and if you look on my blog during those periods you can see I moved to the sidelines, operated from the short side, and kept longs small on the long side during those times. However, betting hard on a sustained downtrend is just not the right play when we still have the major indexes holding their 50 dmas.

Next week we have the important PPI on Thursday and the CPI on Friday, May retail sales, options expiration, and some earnings from select brokers LEH BSC and GS. Enjoy the rest of your weekend and I will see you in the chat room.

top holdings up this week - purchase date

TRCR 430% - 1/12
PTT 303% - 11/16
MA 187% - 8/2
CCOI 144% - 9/27
OMTR 134% -
TTEC 130% - 8/25
ULTR 116% - 10/27
MEH 113% - 8/30
MOS 109% - 10/12
MFW 108% - 1/29
KHDH 107% - 5/30/06
DECK 97% - 9/13
CPA 97% - 9/15
CXW 91% - 5/19/06
IGLD 87% - 10/26
EVEP 86% - 11/16
MVIS 86% - 12/21
APLX 83% - 9/28
VDSI 79% - 1/4
HURN 77% - 9/13
MCZ 74% - 3/27
CLRT 73% - 11/30
CNH 72% - 11/2
TTG 63% - 11/30
TESO 60% - 2/16
LFL 57% - 12/13
NSH 57% - 12/19
AFSI 56% - 4/12
VSNT 54% - 2/5
APFC 52% - 3/5
XOMA 51% - 1/12
HURC 50% - 12/18