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With today's strong advance on higher volume, stocks confirmed a new uptrend. Not all new uptrends are going to be successful but the environment may be more productive for new investments.
Stocks came back from the holiday weekend to post strong gains on higher volume. The NASDAQ closed up 1.4%; the NYSE & S&P 500 rose 1.1%. Volume was much higher than Friday's light, pre-holiday level. The positive action constituted a follow-through on a rally attempt started Wednesday of last week. Ideally today's percentage gain would have been higher. Several IBD 50 stocks demonstrated constructive action on the day, another positive development.
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Stocks remain in a correction and the NASDAQ looks likely to test April support around 2,725. Weakness in Leading Global Growth indicators, among other data released during the week, underscore the challenges stocks face advancing form current levels.
Last week leading stocks continued to experience selling. Monday the NASDAQ fell 1.6% and broke support at 2800. The NYSE only suffered a 0.4% pullback but volume on both exchanges was above average. As a sign of additional defensive posturing by investors, stocks from health care, utility and tobacco industry groups showed the most strength as the week kicked off. 45 stocks of the IBD 50 lost ground on the 16th.
Tuesday stocks bounced back from declines earlier in the trading session to end slightly mixed. Volume climbed on the positive reversal and leading stocks saw constructive action.
Wednesday action followed with nice gains but lighter volume muted them. IBD Top-rated stocks moved up in strong trade but were unable to break out of recent trading ranges. Ideally leading stocks would be moving into new high territory.
Stocks spent Thursday in a quiet session that produced small gains. The IBD 50's 0.5% gain outpaced the S&P 500, NYSE, & NASDAQ.
Stocks tried to rally on Friday but selling in the final two hours dashed hopes for a positive close. Volume was higher but options expiration explains part of the increase. For the week the IBD 50 was down 1.2%, the NASDAQ 0.9%, the S&P 500 0.3% and the NYSE 0.2%.
The selling continued around the globe as markets opened on Monday, largely in response to the deteriorating debt conditions in some European Union members. In the U.S. the NASDAQ suffered the biggest decline, down 1.6%. Volume came in lighter on the major indexes but evidence continues to mount that we may be in the early stages of a significant correction.
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Guilty on all 14 counts. That was the verdict rendered against Galleon Group hedge fund founder, Raj Rajaratnam. His defense team has already announced their intention to appeal to the 2nd District Appeals Court in New York. Apparently his lawyers do not believe the 46 recorded conversations should be allowed as evidence. I believe the SEC was granted a wiretap after demonstrating a series of suspicious trading activities in Galleon accounts. Turns out they were onto something but not if Raj's defense can stop it. There are many similar cases waiting to be tried. Let's hope justice continues to be served!
Leading stocks struggled through another week. We started last week with a rebound but trade volume was light. For more confident buying we need to see volume pick up.
The rebound continued as we moved into Tuesday but action by stock market leaders was mixed. Trading volume rose as the market recovered recent loses but volume for market leaders from the IBD 50 was weak. Only 7 stocks traded on above-average volume. For the stock market to move out of this correction with confidence, we will want to see the market leaders trading on higher volume.
Any constructive market action took a set-back on Wednesday when broad indexes shed from 0.9% on the NASDAQ and 1.4% on the NYSE. The back and forth action has been a common theme since mid-February. It's impossible to know if stocks are going to move higher or lower, but eventually the market will reveal its intentions. Right now it is best to be patient but alert for a change in market character. Five of the leading stock from this bull run, Netflix, Priceline, Apple, Lululemon Athletica and Baidu did not see any intense volume which indicates the mutual funds invested in these companies did not see a reason to buy or sell shares.
After starting the day low, stocks reversed to close higher on Thursday. Usually a positive sign, action again came on lower volume. Much of the day's upside was powered by lagging industry groups. Ideally leading industry groups would be powering a stock market advance.
The week was closed out with a low volume decline. The NYSE along with several leading stocks have now crossed below their 50 day moving average. Moving averages act as support and resistance lines and can provide additional information about the overall health of the market. The broad indexes finished the week mixed, but the IBD 50 led with a gain of 0.6%, a sign of some internal market strength.
Last week's positive finish for market leaders did not last long. Monday sellers thwarted a rebound effort during the afternoon session pushing stocks lower. Again, lagging industry groups led market action. Preliminary volume was higher on the NASDAQ where most of the selling took place and only slightly down on the NYSE. Technology related groups experienced some of the biggest declines.
As we start a new week markets remain in a correction. In this environment is it best to hold off on new purchases until we have a better since of the markets intentions.
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Tracking the action of leading stocks, those exhibiting strong earnings growth and relative price strength, can provide insight into the health of the US economy and stock market. It is one of a handful of data points I use to make investment decisions. When the action of leadings stocks starts to deteriorate significantly it can be an important warning sign of a possible deep correction or worse. Fortunately, it does not appear we are at that point.
After finishing strong in April selling returned to the market to start May. The selling intensified as last week progressed with volume rising during Tuesdays decline.
By Wednesday stocks officially entered a correction phase (based on Investor's Business Daily Methodology) as prices continued to decline on increased volume. The U.S. stock market has been very indecisive this year, logging 11 changes in the Market Pulse section of Investor's Business Daily. Last year it had only logged 5 changes by this point.
Stocks sold off in the final hour Thursday and market character deteriorated further as those stocks that did post gains remain stuck in recent trading ranges.
After a strong open on Friday, indexes gave up most of the day's gains by the close. The one day advance was a welcome event even if it was on lower volume. Overall technical action remains mixed. The Nasdaq, S&P 500, and NYSE are trading near support or resistance levels.
While economic news continues to be mostly positive, the numbers have not been strong enough to power the market higher. I track leading stocks by monitoring the Investor's Business Daily IBD 50 index. One of the great features of this index is that I can look at the index performance as well as the performance of each of the individual components. It is also updated weekly. Some of the component stocks are listed below.
Not Investment Recommendations
- Lululemon Athletica - LULU
- Aruba Networks - ARUN
- Fossil Inc. - FOSL
- ACME Packet - APKT
- Amerigroup - AGP
- Netflix - NFLX
- Tibco Software - TIBX
- Carbo Ceramics - CRR
- Chipotle - CMG
- Mercadolibre - MELI
It is a nice mix of companies from different segments of the economy. Last week's IBD 50 and general market action tells me it is a good time to hold-off on new stock investments until the market has confirmed a new rally attempt.
So far the start of this week has not changed market conditions much. Stocks were able to generate gains on Monday even with negative debt news from Standard & Poor's on Greece, but on a sharp decline from Friday's low volume. At this point two things need to materialize for the market health to improve and I will let you know if they have in my next weekly report.