Three True Leading Stocks (AMZN BIDU AAPL) Hold The Market Up Despite The Horrible Breadth

July 26, 2007

Today’s trading shows that it still is not the right time to be calling a top and the action after-hours confirms this. AAPL and BIDU both blew away numbers after hours and both are trading up considerably now. AAPL blew past third-quarter forecasts, driving shares to an all-time high in after-hours trading. The stock was up more than 8% to $148.50 following the report, a slight retreat from earlier toppling the $150 level in extended trading. Then Chinese Internet company BIDU breezed by Wall Street’s second-quarter forecasts Wednesday as profit more than doubled up 128% and sales up 120%. This gives BIDU eight straight quarters of EPS and sales growth over 100%. Simply incredible. This is a leading stock! Shares rocketed 21.6%, or $39.61, to $222.84 after hours.

However, despite these stocks holding up and leading the market, the breadth today was quite poor as decliners beat advancers on both exchanges despite the gains. This shows up also in the new lows where there were 551 today compared to 105 new highs. So obviously it is very weak out there and if you check out a chart of the advance/decline line you can see that that line is leading the indexes lower. The other area it is clearly obvious that weakness is now in this market is in leading stocks. The IBD 85-85 index fell .4%, as this leading index failed to keep up with the indexes for the second day in a row. Leading stocks are getting hit hard and are not holding up like they were since March.

Existing home sales fell to a 4 1/2-year low in June, the National Association of Realtors said, along with the subprime lending worries are just two double whammies that are nailing the financial stocks. Elsewhere, private equity firm Cerberus Capital Management has had trouble tapping debt markets for the $12 billion it needs to buy Chrysler, which is part of a negative trend in the LBO arena. This has created some very weak breadth out there by nailing all the financial stocks.

As long as tech stocks like AAPL AMZN RIMM BIDU and stocks that act like tech stocks CROX hold up, that will keep us from rolling over. However, if these leading stocks with great earnings start topping on heavy volume we should watch out as that, along with the weak financials, would probably doom us to lower prices. As it is, BIDU and AAPL are showing investors what happens when you short too soon. You get burned!

That is why I still am not shorting stocks. You can clearly see that most of my short recommendations continue to hold up and offer a safe entry or are already moving lower. This shows me that the mood of the market has definitely changed if my shorts are working better than my longs. Which is the case. However, I still find it silly to short a market where the overall trend is still up. If you think I am silly….once again, I will remind you of AMZN BIDU and AAPL.

The market is definitely in a battle ground right now with the bears in control of the actual betting with the put/call at .98 and the NYSE short interest ratio still near all-time highs currently at 7.77. Meanwhile, bulls reign in the opinion world of newsletter writers as the bulls vs. bears ratio showed bulls rising to 54% and bears sliding to 18%. So obviously the “smart” crowd is not bearish and in fact is bullish. However, it appears they sure are hedging their bets.

This market is a battle right now and I think it is best to keep cash heavy; short a little if you want to but know that I am not ready yet. When the market fails a rally and sells off on higher volume and my favorite huge growth leading stocks start breaking down, then I will begin my operation. For now, I will hold my beautiful green longs, cut my red filled laggards, and keep my cash on hand for a better buying opportunity.

I have to do that, because it is obvious buying stocks now is not the smart thing to do. Aloha and I will see you in the chat room, for one last normal session before my vacation starts. Aloha!

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