Stocks Rally For Second Straight Day, On Lower To Flat Volume; Funds Still Have No Interest In This Market

March 20, 2007

It was another day of light gains, for the stock market. However, today, had a bit more of a steady bullish bias to it, unlike yesterday, as big-cap indexes closed near their HOD. The good news for stocks came on the back of a better-than-expected housing starts number for February. That number was up 9% for the month, which is much better than the 14% drop in January. The bad news, in that mix, came from building permits as they fell again by 2.5%. The other positives effecting stocks was M & A activity. The news that CYTC is making a full bid for ADZA and that PALM might receive a bid for its business might have had a positive impact on stocks.

At the close, the SP 600 led the way with a .8% gain, retaking its 50 day moving average. The NYSE rallied .7%, the SP 500 and Nasdaq each gained .6%, and the DJIA gained .5%. The IBD 100 led again, for the second straight day in a row, with a .8% gain. That is two days now that the index has been on pace or kept ahead of the market. NYSE volume was slightly lower and the volume on the Nasdaq was lower by 4%, indicating that big institutional firms still have no interest in snapping up large amounts of shares here. Advancers beat decliners by a 5-to-2 margin on the NYSE and by a 2-to-1 margin on the Nasdaq. New highs beat new lows by 211 to 68. The breadth and new highs show that there still appears to be more upside left in this dead cat, high put/call (1.1) ratio bounce.

I am still only calling this a bounce, because I am not seeing ANY new stocks appear on my scans with green beautiful charts. And I am not seeing any accumulation what-so-ever on the indexes. We are going into day six of the rally attempt. If we do not get a 1.7% gain on heavier volume tomorrow or on day seven, the chances of us getting a rally that will produce anything special is greatly reduced. Remember how long it took the rally off the July/August lows to get started last year? It was well over 10 days. That launched one of the weakest rallies I have EVER been a part of. Only 180 stocks made 100% gains or more during that advance. That is stunningly pathetic. The longer we wait on the follow-through, the less of a chance we have of having a great rally. I am not looking for a follow-through to happen and even if we get one I expect it to fail shortly after. We really have a LOT/TON of work to do to fix the mess that the February 27th sell-off created.

However, there are a TON of impatient traders out there that have learned NOTHING from history’s greatest traders. Livermore, Loeb, O’Neil, Baruch all knew how important it was to sit on cash and not invest when the odds were not in your favor. How do you know when the odds are not in your favor? When the indexes are not in a serious uptrend or downtrend. When they are going back and forth like this it has always been the cash play that has been the smart play. The impatient and history ignorant traders that are swinging for the fences in this market are going to eventually be served a very painful reminder on why it is not smart to make overly bullish or bearish bets in a market that is confusing like this one is. These traders will NEVER learn and it is probably for the better as they ensure an even more liquid market for trend traders to enter.

If you feel like you are missing out on the action, then trade with a little bit of your money. Just don’t make any stupid bearish or bullish bets with all your cash in this market. There is for sure to be more wild price action in the coming weeks, depending on what the FOMC has to say. That meeting wraps up tomorrow at its usual 2:15EST. Nothing new is expected to come out and the Fed is expected to hold rates steady at 5.25% for the sixth straight time. The wording in the statement is what all commentators will be focusing on. It seems that a slowing economy and inflation is what is occurring now in our markets. If that is the case I sure wouldn’t be looking for the Fed to be cutting rates anytime soon.

Tomorrow the fireworks will all be over the Fed. However, we are setting up for a positive open tomorrow, on the back of good earnings reports from ORCL and ADBE. This positive open is sure to cause the early shorts more pain. Everyone was asking me three weeks ago why I wasn’t shorting everywhere. Well the past two days of gains is one of the reason. The other reason is simply history. The best time to short stocks is FIVE TO SEVEN MONTHS AFTER THEY HAVE TOPPED. Being too early has cost many great traders many profits. I am not one of these traders who will lose my profits by trying to be a hero. I don’t want the top and the bottom. I want the big meaty middle; the filet-mignon, if you will.

Before I wrap it up for the night and go out to see the movie “300,” I want to bring to your attention one key stat I saw today: The Singular Research group offered a report today stating that margin debt is at a new all-time record of $296 million in February. This is considered a contrarian indicator and signals that the crowd overall is very bullish buying stocks on margin. Do you know when the last all-time high was? It was in March of 2000. The month that the meltdown in tech and internet stocks started. Take it for what it is but this report has not seen those numbers since the last IMPORTANT top in the stock market. The current short interest on the NYSE is very low and the amount of share buybacks are still very bullish overall for the market but the crowd is going out on a limb buying stocks and in the long-term that could be very negative. On the short-term though it is hard to argue with all the share buybacks.

Which side is right? We don’t know yet. CASH IS KING!!! right now. Until we get a clear trend and truly know which side is the right side, I will continue to play the beautiful longs that setup and the ugly shorts that setup. There isn’t a lot on either side, which tells me we still have more time to tire and frustrate the weak traders and investors, in this market. I hope you had a great day. I had a TON of errands to run and had to help out a vehicle-less friend all day so I apologize for the lack of showing up in the chat room today.

Aloha and I will see you in the chat room tomorrow. Remember, CASH IS KING!!!