Stock Indexes Erase Early Morning Losses, Rallying Into The Close, Closing Near Their Highs Of The Day

February 17, 2007

Stocks fought off morning weakness, caused by a revenue warning from MSFT, and rallied the rest of the day to close flat and near the highs of the day. This bit of news from MSFT particularly hit the Nassy the hardest as MSFT represents 6% of this index. The strength in the indexes in the face of the selling in MSFT shares can only be seen as impressive. Many traders expected much worse, considering that the news came on top of a report showing Housing starts falling 14%.

At the close, the SP 600 led the way, again, with a .3% gain, the SP 500 followed with a .1% gain, the DJIA finished just a tad higher closing up .02%, and the Nasdaq lagged but still reversed a .6% loss to close near the high of the day only losing .03%. The IBD 100 and the IBD 85-85 each rallied .4%, outpacing the general market. That is the third straight day of outperformance, after a series of weaker closes during the past week. For the year, the IBD 85-85 is outpacing the index, showing that leading stock do have the upper hand, again.

Volume was lower on both the NYSE and the Nasdaq. Which is odd considering it was an options expiration day. The lower volume, however, is not unusual for a market that is coming up on a three-day weekend. So I guess overall the lower volume was not that much of bother. Breadth was flat to positive on both indexes, with the NYSE advancers and decliners coming to a standstill and with advancers beating decliners on the Nasdaq by a 8-to-7 margin.

For the week, the SP 400 was the leader with a 1.6% rise, the Nasdaq and the DJIA followed with a 1.5% gain, the SP 600 followed with a 1.4% gain, and the SP 500 finished 1.2% higher. The great news comes via leading stocks. Thanks to the past two market sessions, the IBD 100 was able to lead the way with a 2% gain for the week.

Even though the indexes had a nice strong reversal, there really wasn’t that much moving this market on Friday. Oil did rebound 2%, housing fell 14%, and MSFT did warn but besides that it was a pretty boring day. Unless, you count the rumor of GM being in talks with DCX to buy Chrysler news. However, that kind of news is not the kind of news that moves a market. What does move the market is buying by big pension, mutual, and hedge funds. These guys make up over 75% of all trading in the market and you can guarantee they don’t buy stocks based on merger rumors.

However, the great action today is only considered great because of the potential damage a selloff in MSFT could have done. This stock represents a lot of the indexes and the fact that the market rallied in the face of this selloff shows how broad this rally STILL IS. Closing near the highs of the day was even a nice little bit of icing on the cake. That last hour push was also the result of all the puts bought the past two weeks.

The put/call ratio has been steady around the 1 area. That is bearish as it means just as many investors bought calls on the market as puts. This is a sign of negativity as traders place bets on stocks falling. However, the high put/call ratio is a contrarian signal and as long as that many put buyers are around the indexes will probably keep rallying. At the end of the day it did manage to close .76. Those that are betting against this market are foolish and the last hour of trading on Friday shows why it is so silly to short or buy puts on a market in such a strong uptrend. The shorts and put buyers get what their greed and gamble deserved.

There is even better news for me. I am finally starting to find some new longs with good chart patterns again. It is not that I wasn’t finding them before. I just wasn’t able to find much of any quality recently. With the market going up and hitting all-time highs, this became a problem, as I figured still many stocks would give buy signals. The quality stocks simply did not show up. Now, however, a few have and even some speculative stocks showed up Friday with really nice chart patterns. A change from the previous two weeks.

So we have a another clear weekly victory for the bulls. Even though the market is short-term overbought, nobody cares. And you shouldn’t either, until the indexes actually selloff on heavy volume. With only 1 distribution day on the Nasdaq, with this solid uptrend, I don’t see that happening anytime real soon. But with me saying that, that normally is the kiss of the death that ends a rally. So maybe we should expect a pullback. However, if the recent trend is a guide, that pullback will be bought too.

If you are positioned correctly, like I am, then the constant buying is a beautiful thing, even if you can’t find a ton of new longs. However, if you were like most people and missed the beginning of the rally, this buying definitely does suck. Thankfully, like I said earlier, there are some new good buy candidates that have shown up. So I am not as worried about the constant gains as I was before. Still it is hard to buy stocks breaking out of great long bases when the market NEVER pulls back. Seriously when in the hell is this going to end? Until it does end, you can guarantee that you will not see me short one stock or even think about it. The trend is just too strong. No trader in his right mind should fight this trend until it is over.

With that, I hope you have a wonderful three-day weekend. Happy President’s Day–or as I like to say Ronald Reagan Day!! Aloha and I will see you in the chat room!

Stock Indexes Erase Early Morning Losses, Rallying Into The Close, Closing Near Their Highs Of The Day

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