Stock Indexes Close Lower On Higher Volume, Producing The First Distribution Day Since The Follow-Through On Wednesday; Is This Rally Done Already?

March 29, 2007

Stocks turned tail Wednesday and for the second day in a row dip-buyers did not show up as stocks moved lower, with an intraday roller-coaster ride mid-day after a speech by Ben to a Congressional panel, closing near the lows of the day. Things got off to a bad start, after the February durable good came out below expectations of a 3.5% gain with an actual 2.5% gain. That might have been bad but the ex-transportation numbers hitting YOY growth lows not seen since 2003 and capital goods coming in 1.2% lower and at lows not seen since 2004 were probably what really gave traders a scare. On top of that, add oil hitting six-month highs of $68 after-hours and settling in at $64.08 after weekly inventories were announced falling by 900k, comments by Ben that inflation is still a worry, and the tensions between Britain and Iran over the naval incident and you have plenty of reasons for stocks to go lower; and lower they went.

At the closing bell, the DJIA, Nasdaq, NYSE and SP 500 all closed with .8% losses. The SP 400 and SP 600 held up well, only falling .4%, showing where today’s leadership could be found. Despite the big cap indexes closing near their LOD, the small-cap indexes both showed positive intraday reversals off the lows. The IBD 100 and IBD 85-85 both held up better than the market, only falling .7%. That is bullish divergence by leading stocks, despite all the negative headlines. But even with these indexes holding up well, the best industry on the day in the IBD 197 industry group was the Food-Flour & Grain group moving higher by 2.4%. Yippee! That makes for an exciting bull market. Combine that with old leaders, other defensive issues, and health service stocks and you have the stuff of a boring slow low-VIX market that decides to keep going higher despite four-years of gains without a 10% pullback in the DJIA.

Volume was higher today on the NYSE by 10% and higher on the Nasdaq by 17%, thus giving the market its first distribution day since the follow-through day last Wednesday. Remember, a distribution day here and there at the beginning of a rally is normal. What will not be normal is about four to five distribution days within a span of a couple of weeks to four weeks. At the same time, however, the best bull markets do not normally flash a distribution day within the first week without having another big day of gains after the follow-through.

Breadth was negative on both exchanges, by around the same margin, with the Nasdaq and NYSE producing two decliners to every stock that advanced. There were 177 new highs to 73 mew lows. There are still no divergences showing up in these statistics. The put/call ratio also jumped to 1.16, indicating that there is still fear in this market. And in the Investors Intelligence survey bulls climbed to 48.4% and bears declined to 27.5%. These stats, to say the least, are very ambiguous when it comes to telling us how the market feels. There are still a lot of bulls out there, the Investors Intelligence came in with bulls rising to 48.4% and bears falling to 27.5%, in the most recent poll. So take that in also.

Some of the weakest action, once again, came from the homebuilders, as the Philly Housing index fell 2.2% and the IBD Building-Residential/Commercial group fell 2%. The Auto-Manufacturing group fell 2.4%, along with Metal Product-Fasteners 2.4% fall, to help lead the way lower. The homebuilders woes today was blamed on BZH and possibly not helped by the news NEWC will file for bankruptcy this week (the stock is now at $1.11 on the pink sheets from $45 on the Nasdaq in August 2006–buy and hold? No thanks). The auto group’s woes were blamed on the news that GM will not make a bid for DCX. Is that really a surprise? What would GM do? Send the Union in to destroy DCX next.

The worst bit of news, that I personally heard, today, was the fact that Ben is clearly telling us that inflation is “uncomfortably high.” This is as clear as a signal that you can have that he has no intention of cutting rates anytime soon. I will go so far as to say more rate hikes are even possible. The other bit of info he dropped on us was that the sub-prime market would not hurt the economy but that it will hurt housing. Really, Ben? Thanks. I tell you what, with that kind of information, we should all just go ahead and stick our head in the sand. I really doubt the sub-prime market is not going to effect the economy. I guarantee you that it does. This sub-prime activity was a bubble and the housing market was a bubble. Bubbles take years to unravel. What was Ben going to say? “Oh crap, all hell is breaking loose in the housing market and this is going to spill over to consumer spending and savings and hurt the market.” You are not going to ever hear that. Ben, the economy is clearly slowing and we have inflation. Not good!

However, despite what is going on underneath, we still only make money on the actual price and volume of the indexes. Those indexes are technically in an uptrend following the March 21st follow-through day and until we either violate the lows or get a few more distribution days soon there is no reason to fight the trend. Even though that trend is giving us an extremely small amount of quality stocks breaking out of quality bases. What it is giving us is a lot of small and cheap stocks breaking out of pretty bases. There is nothing wrong with that but it sure in the heck is a lot harder to buy a ton of a stock that has either no earnings, no sales, horrible liquidity, or is too volatile. The extremely pretty charts in the IBD CANSLIM quality longs are simply not there. Sure there are stocks like JAX tonight that come along with a beautiful chart and OK but not great fundamentals. But until I get a chart like that in a stock that has growth like SMSI, it is hard to buy more than 5% of my account (that would be like 20% or more to you) in any of the stocks I am getting currently. In fact, TESOF, is the only stock this year where I have put 5% of my money into. If you have TCNet and you use the BOP indicator, you know why I bought so much and why I am still long 90% of my stock still.

This brings me to my point: I still don’t see how this market can rally much from here without more downside. The leadership in this market is pathetic, the low VIX, and the fact that we were not even in a correction for a full month really bothers me. The best stock market rallies do not start without stocks with amazing fundamentals breaking out of green beautiful bases. They also do not start with VIX under 20 and with a correction lasting only a month. The minimum you need a correction to last is at least two months. Most rallies that started after a correction started and did not spend at least two months in a bear market failed. The best rallies see markets go through at least three months of a correction. This helps set up beautiful bases in the next leaders, as the old leaders fall and the new leaders slowly move up for the next bull. This low VIX, lack of leadership, and weak rally after a short correction all just looks wrong. These are all signs of a market near the end of its rally stage, and if there are more gains to come, a market that will not be going very much further before more selling hits it.

Stock Indexes Close Lower On Higher Volume, Producing The First Distribution Day Since The Follow-Through On Wednesday; Is This Rally Done Already?

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