Afternoon Rally Gives Stocks Support, Off Of Yesterday’s Selloff; Nasdaq Holds Its 50 DMA, SP 600 Regains Key Line.

January 20, 2007

Stocks were able to find some support, yesterday, after a nasty selloff on Thursday did some damage to stocks. IBM started the day off wrong when its stock gapped down over 3.5% and put pressure on the indexes. However, a late afternoon rally, for no apparent reason, helped lift the SP 500 and Nasdaq to a positive close.

At the close, the SP 600 led the way with a .8% gain, the Nasdaq and SP 500 followed with a .3% rise, and the DJIA was the lone loser but it only ticked down a fraction. Leading stocks did their thing today, keeping up with the SP 600, rising .8%. The big winner was the NYSE. That index rallied to a new all-time high.

Volume was much lower on the Nasdaq, not giving a particularly positive situation to this bounce, after such a sharp decline on heavier volume yesterday. NYSE trade was slightly higher, giving that index an accumulation day.

Breadth was positive on both indexes, with advancers over decliners by a 3-to-2 margin on the Nasdaq and by a 2-to-1 margin on the NYSE. Good strong breadth on a day of support, after a selloff, is nice to see.

It was a rough week, for the Nasdaq and SP 600, with each falling 2% and .75% respectively. The SP 500 also lost .02%. The DJIA and the NYSE, however, escaped with gains, rallying .1% and .4% respectively. Big-cap non-tech are still holding this market up, even with big-cap tech trying to drag it down.

The worst performer was the SOX index. That index got trashed by 5.3% and TONS of stocks broke down from solid bases. I listed them in the last post, on Thursday’s market. That index is normally like by traders to be a leading indicator of momentum stocks and the ability to make a lot of money in the market. Well, if that is any indicator, the market is not going to offer a lot of speculative money. The long-term trend is down, the intermediate is up, the sub-intermediate is down, and the short-term is down.

Anyone long this extremely weak sector needs to reevaluate their trading strategy and reason to be long this sector. They are being sold hard and they are being sold all-around.

Overall, it was a rough week, but what do you expect from a market that has gone basically straight up since August without a reall selloff.

Avoiding a fourth straight down day for the Nasdaq is an accomplishment in and of itself after such a nasty selloff we saw on Wed and Thurs. As I said yesterday, signs have been pointing for an upcoming selloff for a little while now.

With big-caps leading, breadth poor, growth stocks taking forever to take off, and new highs contracting this rally has a feel of a rally near the end of its great bull.

Still trying to predict a top, after four years of gains is pretty stupid, imo. How many top pickers have I met the last four years that no longer trade for a living? Sadly, I don’t even think I can count that high (I am exaggerating).

The trend is still up and the fact that the Nasdaq, again, found support at the 50 dma is very positive for the chances of further price gains. Heck, the NYSE hit all-time highs. How can it be smart to be short here? It isn’t.

The fact of the matter is any selloff has plenty of room underneath and stocks in uptrends to find support from institutional traders. It is when the markets start A CLEAR DOWNTREND and we have multiple distribution days that we need to take caution. Three in the past four weeks is a lot, for the Nasdaq. But until we get one more and a clear downtrend can be seen on this index betting against the trend is simply retarded.

The greatest traders of all-time NEVER bet against the trend; EVER! They waited until the market was giving no new buy candidates, there longs were violating key support areas, the markets were in downtrends, and for leaders to start selling off, across the board, on heavy volume. We are not there yet.

The other important thing to remember, which IBD hit on this weekend, is the fact that this is normal for a market to have pullbacks in uptrends. I hate markets that rally like this without a selloff. Why do I hate it? Because, normally your biggest one day declines happen after stocks race higher and higher and higher without ever having a normal pullback.

Some of the biggest price declines in history of the stock market come during a bull market. Visa versa with selling. Some of the biggest up days in the market come in the middle of bear markets. It is obvious why this happens. These one day sharp declines ALWAYS scare the weak bulls into selling there good longs. I know many traders who let go of stocks on Friday only to see them rebound and hold their moving averages.

In bear markets, short squeezes always nail bears who bet too far on the short side. When this happens normally rational decisions are then left far behind and the next thing you know you are covering a stock just as it is about to top out on the short term and resume the downtrend. The market is a cruel beast. And I love it!

This is why you must stay disciplined, disciplined, disciplined. I can not believe some traders sold perfectly great stocks with HUGE EPS and sales growth when the chart did not flash a sell signal. This is panic trading, and though you will never go broke this way, one thing is for sure: You will never become extremely wealthy that way either.

What is the stock going to do in the future? I don’t know and NO ONE does. When they tell you they know, they ARE LYING TO YOU. The market has been up for four years and we now have big cap stocks leading when they have not the entire way. I have studied enough market cycles to know that at the end these stocks lead. This rally could last another six month, for all I know. However, I am starting to plan for a correction, in my head. I just wont bet against the market.

Until that correction happens, I am going to continue to stocks with beautiful green charts and some sort of strong fundamental growth. When they stop showing up, then I will know my feelings are in step with the market.

The first signs of a slowing in the economy, besides an inverted yield curve and slowing economic data, is recent earnings.

Positive surprises have outnumbered negative surprises by a ratio of about 1.5-to-1, Zacks Investment Research says. At this point during Q3 earnings season, positive surprises outnumbered negative ones by a ratio of better than 2-to-1. Earnings growth keeps rising. But the median company in Zacks’ universe has banked Q4 profit growth of 9.4% â€” below some recent double-digit tallies.

This is clearly showing a slowing economy that is now starting to hit the financial statements of stocks.

It was a good day Friday, not seeing the market follow-through with even more selling but still with the lack of volume I am not sure how much the bulls can muster here to overcome the recent selling pressure.

We will see what next week has in store for us. Aloha and I will see you in the Chat Room!