Stocks End Mixed On Lower Volume, As A Big Merger Rumor Helps Lift Stocks Off Their Lows.

January 27, 2007

Stocks started the day off very strong but soon started selling off, after strong durable goods orders, strong new-home sales, and bond yields ticking higher sent signals to traders that the Fed would not be cutting rates any time soon. Thankfully, a rumor of Bank of America and Countrywide Financial merging and more positive earnings helped lift stocks well off their lows.

By the closing bell, the SP 600 led the way regaining its 50 dma with a .4% gain, the Nasdaq gained a point closing up .05% after falling as much as .6% intraday, and the DJIA and the SP 500 finished lower by .12%. However, they managed to finish well off their lows. The IBD 100 kept pace with the SP 600, gaining .3%. Overall, it was a good day, with the indexes putting in a positive reversal off the early selling.

Volume was lower on the NYSE and the Nasdaq, as most traders probably decided to call it an early day and start the weekend early after all the wild fireworks we had this week.

Breadth

For the week, the Nasdaq led the way down with a .65% loss, the SP 500 and the DJIA lost .6%, and diverging from the other indexes, the SP 600 gained .4%. The SP 600, if you look on a weekly chart, has put in another beautiful weekly reversal; its 5th week in a row.

For all the negativity and top calling out there, this week, the market sure didn’t collapse like most would have thought so if they were only monitoring the message boards and chat rooms I monitor. It is amazing that in a sea of so much confusion and short selling, that we are still making good money on the long side and outperforming the market.

I wonder why people don’t see what we see? Maybe, it is because, they do not have the wisdom to actually follow the price action but instead they blindly think they know more than the market and support their own bias even if the stock tells them in black and white that they are wrong. Scary, if you like to keep and make money.

Instead I like to follow what the market actually does. What it is doing right now is telling us that it does not know what it wants to do. This battle going on at the 50 dma with the Nasdaq and the SP 600 signal that big investors are not overconfident about chasing stocks up here.

At the same time, they are not looking to completely unload either. That gives us this battleground, that when taken with the AII showing bulls, bears, and sideline investors all at the 30-40% area, shows that the market just doesn’t have the clarity it once did when this rally was unfolding off the August lows.

However, back then, I was the only one I was reading who was actually semi-bullish on the market, besides IBD. I was going long stocks when others were calling for tops. Here we are up anywhere from 10-15% on the indexes from those levels and we still have top callers. I don’t think that is wise, even at this stage of the game.

I want the market to clearly start a downtrend, be below the 50 dma, and show at least four to five distribution days, before I even think about calling a top. And even then, to say that we would not be able to retake those highs in the future have to be entertained. Nothing says that the four plus year bull market has to end simply because we are up for four years.

We will need all those longs that I have in my portfolio to give clear sell signals, topping signals, and other classic “get-out-of-dodge” signals, along with all the above market conditions to come to fruition.

If stocks keep holding their support levels, I keep getting stocks breaking out, and don’t have many stocks to sell based on light volume pullbacks, then we can not say if the market is really going to top.

You need ALL of these things to line up, before you can even think of calling a real top. Until you see everything above happen, you are just a fool playing a fool’s game, if you think you know when this market is going to top.

Remember, just because the indexes go below the 50 dma does not make them bearish either. They need to fail at that line multiple times and then trade below the 200 dma, before you can actually write an index off and stop worrying about finding new longs and instead can concentrate on finding good shorts.

I am STILL not sure what compels smart individuals to think that they can outsmart the entire stock market by trying to predict what will happen tomorrow or even next week. I am not sure why people think there opinion is more important than the market but I don’t have to know. All I know is that when these people eventually fail–and fail they WILL–I will be here counting and collecting my profits that the market gave me. Did you hear what I said? What the market gave me. I have nothing to do with the actual move and decision of the market making me money. It decides the final outcome.

The market is definitely on some shaky ground. The reversal and failed breakout was not re-reversed on today’s action so caution must continued to be exercised via keeping new buys a little bit smaller than what they were before and only concentrating on the best of the best stocks in the market with good chart patterns.

The bulls are not done yet, so it seems, and the bears sure don’t get much going when they do finally get something started. So we are left with this wild sideways action.

The Fed meets again next Wednesday. Interest rates are expected to remain unchanged for the fifth straight time, at 5.25%. That should come as no surprise to anyone who can breathe and process oxygen.

Aloha, have a great week, and I will see you in the Chat Room.