Stocks Gap And Trap Shorts On Lower Volume; Second Lowest Volume Since Last Week of 2006

March 19, 2007

It was an exciting morning, as stocks gapped higher, as many investors were expecting a big follow-through day. However, after that gap up, stocks did not go much further than that, giving a feeling of a short-squeeze and not real buying by funds. The gap up, this morning, gave credit to the overnight success of Asian markets and the rash of mergers and acquisitions that took place.

Rumors circulated that BCS is ready to make a bid for ABN, CYH bought TRI, HERO bought THE, SVM was bought by a private equity group, TXU received a higher bid from another private equity group, and TTWO announced plans to possibly sell itself. With all of this M & A activity, it is no surprise stocks were up so much today.

At the close, the NYSE led the way, thanks to oil stocks, rallying 1.2%, the SP 500 gained 1.1%, the DJIA and SP 600 gained 1%, and the Nasdaq lagged with a .9% gain. The positive news, that possibly bodes for further upside in the short-term, is the fact that leading stocks outperformed on the upside by a good amount. The IBD 85-85 gained 1.6% and the IBD 100 rose 1.8%. That outperformance is wider than the outperformance on the downside that we have seen since the rally failed last week.

Volume was lower on both exchanges. On the NYSE it was 30% lower than Friday’s total. And the Nasdaq was 20% lighter than Friday’s level. But the really high volume on Friday was due to quadruple-witching of options so lets pretend that day did not happen and we want to compare the volume to Thursday’s level. How did it do? It still came in lower. That is a negative for a day that stocks are up. Gains on lower volume indicate that the big-boys do not have interest buying stocks here and instead short-squeezes are causing bids to rise. Today’s volume was also the second lowest of the year; not very encouraging for those dip buyers, for now.

Advancers beat decliners, today, on both exchanges. Winners beat losers by a 3-to-1 margin on the NYSE and by a 2-to-1 margin on the Nasdaq. However, new highs only beat new lows by 170-74. There were a lot of stocks making new lows on a day where breadth was so positive. Along with that positive breadth and good amount of new highs, the put/call ratio came down to .77, indicating today’s broad rally convinced a lot of options traders that they should place bullish bets. Since that is a contrarian signal, we will see how that plays out. This ratio has been wild but has done a good job of creating short-term highs and lows with its wild range.

Even if we do keep rallying, you can see, via today’s leadership that we probably won’t be going higher with much power. The old leaders led today: Steel, Oil, Mining, and Banks all made 2% or better moves. The AMEX Oil index was up 1.7%, leading all sectors to the upside. There are some very beautiful oil charts out there (TESOF APAGF) and there are some setting up in nice patterns (PKD) which means that this sector could have more legs. I am long a fair amount of one oil stock I am very happy about. So I wouldn’t mind some more gains. However, overall, this is not bullish for a fresh bull market. There needs to be new leadership as there is almost (90% of time) always new leadership in each cycle.

So prices were higher. Big deal. Many traders seemed frustrated that they missed being long today’s move. But the market could have just as easily have sold off, considering the situation it is in currently. There is no trend and there is no volume on the upside, so betting on today’s move up was just a lucky stupid bet. Today’s gains completely felt like a short-squeeze on the 1.2 put/call ratio put buyers. There was simply nothing but back and forth movement, after the open. If this was the kind of buying for a follow-through, you would have seen stocks rally all day long, after the gap up. Instead they just bounced around, holding higher, doing their best to scare out shorts. And I believe they did their job. The put/call, as I mentioned before, fell to .77.

The Nasdaq, right now, seems to be having trouble getting back over that 2400 level. It is becoming strong resistance, after being strong support during the uptrend. With this resistance right here, there could be some more downside pressure on the markets soon. As we already saw on Friday, we have one distribution day already, since the rally started. Like I said, I find it hard to call it a clear distribution; but it was higher volume on a day with prices down .2% or more.

However, we can forget about that day if we get a follow-through day here in the next five days. We have missed the best day to get a follow-through; day four. Day four of rally attempts have normally launched the most powerful bull markets (March 2003, Nasdaq up 2.8% on volume higher than previous three months). But a bull market can still work, if we get a gain of 1.7% on higher volume within the next five to seven days. The longer we wait to get it, the higher the chance of failure. The big powerful bull markets almost always start very early after a new rally attempt starts. They also don’t have distribution days. We have one.

There are a lot of stocks still holding uptrends (I am long 170 stocks), but there are still NO quality CANSLIM stocks breaking out of perfect bases. On top of that, there are very very few speculative stocks breaking out of beautiful bases. It is quite dry out there. Add to that the fact that I am shorting now and finding on average one good short a day says that the market is not ready to be bearish or bullish. It is here to wear and tire most traders out. My new longs are still acting much better than new shorts. So that tells me that if longs are doing better that I should still be working from the long side. I am just not going to put all my cash to work. I am about 45% invested in equities. The rest is in cash, waiting for a real trend. A real trend, we do not have.

The longer we hold up here, the more hope and greed will end up returning to the market, as the average Joe is convinced that this is just another normal pullback that we have seen since March 2003. Too bad they don’t look at charts. If they did that, they could see that this pullback looks much different than the rest as the charts that sold off did so on big volume making their charts very red and ugly. The pullback in 2005 was bad but there were still charts popping up then. There is much less this time. And this time CNBC is telling every average Joe who now watches Mad Money that they should be buying this dip.

I say: CASH IS KING!!!! Stay patient and wait until we have a clear trend. Then we can expose ourself more into the right side of the market. You know, the side, that doesn’t exist right now. You may dabble but don’t go all-in. I repeat: CASH IS KING!!!!

Aloha and I will see you in the chat room.