Stocks Finish Slightly Higher, On Lower Volume; Merger & Acquistions Trump Terrible Economic Numbers

March 15, 2007

Stocks finished slightly higher, today, after a barrage of economic data, mergers & acquisitions, and even a scare from Alan Greenspan warning of the subprime loan sector spilling over and effecting other areas of the economy (people didn’t know that would happen?). However, the gains weren’t that impressive as a choppy day of trading had very little volume behind it. At the start of the day, the Philly Fed index came in with a disappointing 1.9 reading, the Empire Manufacturing index came in with a disappointing 1.85 reading, and the Employment Index came in with a -2.3. Jobless claims also jumped to 12,000. That was 4 times more than expected. To go along with that, the PPI almost doubled in February with a 1.3% gain. Analyst expected a jump of .6%. So we had terrible economic numbers along with an inflation scare that caused traders to talk about the Fed raising rates. That of course is the worst scenario possible. We call that stagflation. There is nothing worse than stagflation.

However, the market decided to ignore all of that news and instead seemed to focus more on relieving the oversold bounce and rewarding investors for the continued string of mergers & acquisitions. CSCO anounced, today, that they would buy WEBX. Which should help CSCO’s numbers a lot as CSCO is the old big dog while WEBX is the growing sensation. The big news, though, via the M & A scene was the announcement of ICE outbidding CME for BOT. This bidding war helped BOT shares jump 17%. Too bad I sold out all of my BOT with a .6% gain. There was no reason to sell all of my BOT and now I have learned another valuable lesson. Two in two days! Eleven years of experience and the market is STILL teaching me new tricks.

Back to the market action, the SP 600 led the way today with a 1% gain, the SP 400 followed with a .7% gain, the NYSE gained .5%, the SP 500 rallied .4%, the Nasdaq gained .3%, and the DJIA lagged to the upside with a .2% gain. Not too often you see every index this close but not the same with all their gains. The IBD 100 rallied .6% today, not leading the market to the upside but still keeping pace with the top two indexes.

Volume was much lower today on both the NYSE and the Nasdaq. Volume came in 27% and 23% lower, respectively. The lower volume sure did show that big institutional funds have no interest in this market at all, after that 2/27 sell-off. Advancers beat decliners today, on both the Nassy and NYSE. winners were over losers by a 2-to-1 margin on the NYSE and by a 3-to-2 margin on the Nasdaq. There were 117 new highs to 69 new lows. The strong breadth and good ratio of new highs to new lows is bullish on the short-term but the lower volume shows that it is just traders that are bullish here. The big funds are not. Even if they are, they sure are not putting their money where their mouth is.

The big winners of the day were the Internet-ISP group, with a 5.7% gain. This can be thanked to WEBX, one of the top stocks in the group, getting gobbled up by CSCO. The next best group was the Finance-Mortgage & Related index. That group rallied 3.1% on the back of LEND bouncing back 56% today. The funny thing about this stock is that in the chat rooms I monitor TONS of traders were going long LEND for what “had to be” the bottom for a potential home run. The next day the stock dropped 65%, destroying many peoples account. The worse part comes next. I then watched many traders short LEND yesterday (I guess because it went back over $5). Whoops! Never bottom fish and never short a stock that is sooooooooo faaarrrrrrrrrr away from the 50 and 200 dma. These traders got what they deserved. You should study history; not gamble.

Even though today was a horribly boring day, it still was day two of the attempted rally that was started yesterday. Remember, we are looking for a 1.7% gain on higher volume on day 4 to 7 with 10 days being OK. It doesn’t matter what we do tomorrow. What matters is what happens on Monday. However, if quadruple withching Friday has the amount of volume that we normally see on those days, it is doubtful we will be getting a 1.7% gain WITH HIGHER VOLUME on Monday. Those quad witching Fridays normally have a TON of turnover that skews the volume figures to the upside by a ton.

The other thing I would like to see, if we do get a follow-through, is the markets retake their 50 dma when they do follow-through. Right now, all of these indexes reside below this key line. The best follow-through days also come with the markets retaking this key line. Go study all of the follow-through days since October 2002, after a down trend, and you will see that when the indexes follow-through and continue upward, they do it on a big price and volume move and retake the key 50 dma.

Right now, I just wouldn’t expect one to work, even if we do get one–which I doubt. The battle between the bulls and the bears is very emotional now. How do I know that? Just look at the realmoney.com bullish/bearish poll. Every week we go from extreme bullishness to extreme bearishness. And now that is infecting the put/call ratio. It has gone from 1.52 to .66 to 1.47 to .89, from the closing bell on Monday to the closing bell on Thursday. That is about as wild as you can get on this ratio in this short of a time frame. Quad witching should be fun, tomorrow.

Besides an exciting day of options activity, we also have the ever important CPI. This will be the talk of wall street, tomorrow. So be prepared for that. Besides that we also have the FOMC meeting to look forward to next Tuesday. This will all surely be market moving events. They always are.

Cash is still the proper play here. A little bit of shorts, a little bit of longs, and a lot of cash. That is the best way to be looking at this market right now; with a lot of cash. I am sure there is more choppiness to come. Aloha and I will see you in the chat room.