Option Investor
Market Wrap

Run on Mouthwash Due to Bull's Bad Breadth?

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The major indexes finished the month of April on a sour note with decliners outnumbering advancers by a hefty 3:1 margin at the big board, while NASDAQ breadth wasn't much better with just over 2 decliners for every advancing issue with four or five letters in its stock symbol.

Despite Friday's new 52-week and multi-year high, the very broad NASDAQ Composite's (COMPX) 103-point, or +4.2% rise in April, today's 101 new lows are the most since March 14, when the NASDAQ recorded 27 highs and 182 new lows.

The also-very broad NYSE Composite ($NYA.X), which rose 366 points, or +3.95% in April, and recently set an all-time high last Wednesday (4/25/07) with NH/NL breadth of 400:17, finished down for a third-straight session. The last time the NYSE Composite had a 3-day losing streak was from March 1 to March 5 when the broad list of 1, 2 and 3-lettered stock symbols closed at 8,837.97, its lowest close of 2007.

The also-broad small caps, depicted by the Russell 2000 (RUT.X), which last traded an all-time high on Thursday on NH/NL breadth 100:26 (4/25/07 NH/NL breadth was stronger at 128:16) finished the month of April with a 14-point, or 1.7% gain. NH/NL breadth today was almost flat with new highs edging out new lows by a very narrow 64:61 ratio, but this also-broad list of stocks finds its 5-day NH/NL ratio reversing lower at 73.4% (76.00% was the reversal point). Of the major indexes followed in my U.S. Market Watch (see below), only the RUT.X 814.57 closes below its rising 21-day SMA (819.32).

The benchmark S&P 500 Index (SPX.X) finished up 61.5 points, or +4.3% in April. With the SPX's 5-day NH/NL ratio having recently measured 99.6% on Thursday with daily NH/NL measure of 81:0, today's 37:2 closing measure not overly concerning to bulls, but suggests profit taking at a minimum.

The narrower S&P 100 Index (OEX.X) finished up 30.8 points, or +4.7% in April, while the also-narrow NASDAQ-100 Index (NDX.X) gained 95.39 points, or +5.4%, while its tracker QQQQ jumped $2.43, or +5.6%.

The very narrow Dow Industrials (INDU) surged an eye-popping 708 points, or 5.7%!

Consumer products giant Procter & Gamble (NYSE:PG) $64.40 +2.25%, which makes Scope mouthwash, was Monday's percentage gainer among the Dow 30 components, while the price-weighted index's most heavily weighted stock, International Business Machines (NYSE:IBM) $102.21 +1.02% closed at a new 52-week high.

NYSE, NASDAQ Comp, SPX and RUT NH/NL Measures

I was going to "lead" tonight's Market Wrap with some NH/NL observations when I reviewed some of the major market NH/NL indications at Friday's close, and a post from Jane Fox in today's OptionInvestor.com Market Monitor regarding a Dow Jones MarketWatch piece "Technical evidence emerges that rally getting old" has me even further-alert to some recent measures.

I've always kept a watchful eye on the very broad NYSE Composite and NASDAQ Composite NH/NL daily readings, then created my own 5-day and 10-day NH/NL average ratios. These data are equivalent to what I feel are great measures of BULLISH leadership, or conversely, BEARISH leadership.

Now, there are some observations outside the NH/NL data that will catch a trader and investor's attention of late, but I want to simply note that we want to keep a close eye on things when we consider an observation from Michael Burke and John Gray, and their mentioning of "a high number of buying climaxes" last week.

Burke? Mike Burke? Where have I heard that name? "I know that name," I thought to myself.

Yes! Only tonight is my memory jogged. That's the very Mike Burke mentioned in Tom Dorsey's book Point and Figure Charting. A supply/demand chartist to be certain!

The MarketWatch article went on to describe what Mr. Burke and fellow analyst John Gray were monitoring last week.

"Buying climaxes take place when a stock makes a 12-month high, but closes the week with a loss. They are sign of distribution and indicate that stocks are moving from strong hands to weak ones."


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While Burke and Gray mentioned that "buying climaxes readings over 100 are somewhat worrisome, and the current level at twice that is a further sign of topping action. We usually see at least 200 buying climaxes before the market makes a top, although very often there are 500 or 600. The current readings are a cause for increased nervousness."

Mr. Burke and Mr. Gray noted that last week, according to their calculations, there were 206 buying climaxes.

The MarketWatch article went on to note that Burke and Gray are not "perma bears" simply looking for evidence to justify their pre-determined caution. Their model portfolio of U.S. equity funds, for example, was 80% invested this past week.

As soon as Jane Fox alerted us to that article, I thought about this weekend's Trader's Corner article.

I also thought about last week's CBOE Market Volatility Index (VIX.X) action, where the rise was somewhat "counter" to the S&P 500 Index (SPX.X) 9.7-point, or +0.65% rise.

I didn't have time to check more than 6,000 stocks (NYSE and NASDAQ Composite combined), or 2,000 stocks from the Russell 2000, or 500 stocks of the S&P 500, let alone 100 stocks of the S&P 100, or NASDAQ-100, but running through the Dow 30 was easy enough.

Of the Dow 30, I could only come up with two (2) stocks that would have fit Burke/Gray's "buying climax" price action description.

What does a potential "buying climax" look like? I've heard the term so many times, but what does it look like?

One was AT&T (NYSE:T) $38.72 +0.20%.

AT&T (NYSE:T) - Daily Interval Chart

I placed a BLUE horizontal line at a Friday (4/20/07) close of $39.87, then marked a NH of $40.14 from Monday of last week PINK DASHED, where last Friday's (4/27/07) would have T closing at a week's low (solid red), after a recent 52-week high.

Coca Cola (NYSE:KO) $52.19 +0.13% was the other Dow component that would have fit the Burke/Gray "buying climax" depiction, but KO traded another new high again today.

Anyway, I wanted to see what a "buying climax" might look like in at least one of the 206 stocks that Burke/Gray mentioned.

AT&T (T) doesn't carry all that much weight by itself in the price-weighted Dow Industrials (INDU), as it is the 21st largest-weighted stock.

However, AT&T (T) is a "big gun" in the S&P 100 (OEX.X) as it ranks #5 in this market cap-weighted index!

Verizon (NYSE:VZ) $38.18 +0.76% is #21, but birds of a feather can flock together. Verizon carries the 24th-largest market capitalization in the S&P 100 (OEX.X).

Today, Verizon (VZ) reported quarterly earnings of $0.56 per share before special items (non-GAAP), which was above consensus of $0.53. The company said quarterly revenues came in at $22.6 billion, which was ahead of consensus estimates for $22.49 billion.

Verizon (VZ) currently needs to trade above $38.95, found on 10/30/06 for a new 52-week high.

Closing U.S. Market Watch - 4/30/07 Close

Only the Dow Industrials (INDU) and S&P 100 Index (OEX.X) managed to trade new 52-week highs today, but after doing so, start the week out on a negative note.

With Burke/Gray outlining a "buying climax" and using AT&T (T) as an example of what they may be talking about, or following over time, I'll make note of the S&P 500 new high and new low measures, as a broader S&P indication of bullish/bearish leadership.

Suffice it to say the leadership has been BULLISH. To think otherwise, a new low measure below 12, or 3/14/07 is a good benchmark.

I want to also make a quick note that today was expiration for the May Unleaded (NYMEX:rb07k) contract. In the above U.S. Market Watch, you can see the bullish impact that refinery outages have had compared to the now front-month June Unleaded (NYMEX:rb07m) contract, which settled down fractionally at $2.2594.

Just as May unleaded settled, we witness a decline in June Crude Oil (NYMEX:cl07m), which reversed course from $66.50 to settle down $0.75, or -1.13% at $65.71.

As I type, June Crude (cl07m) is down an additional $0.40 at $65.31.

I maintain a bullish stance on oil as depicted by the U.S. Oil Fund (AMEX:USO) $51.24 -1.14%, but have scaled back to 1/4 bullish position.

While unleaded inventories have seen sharp declines due to refinery outages, oil inventories have steadied due to the lack of refinery draws. My "key level" of resistance for the USO is currently $52.00. Current stop for 1/4 long positions is $48.80.

S&P 100 Index (OEX.X) - Daily Intervals

Since we're alert to some NH/NL observations and a potential "buying climax," or at least know what that might look like, I'm going to place a fibonacci retracement on the S&P 100 Index (OEX.X) from the March 5th relative low close of 630.77, to Friday's 52-week high close of 684.42.

We can perhaps look back at T's chart, then look at the OEX's chart and think, "protect bullish gains!"

I've marked the S&P 100 Bullish % (BPOEX) from Dorsey/Wright and Associates when it reversed back up to "bull confirmed" status on 4/09/07 and signaling this market was seeing demand begin to outstrip supply with 74% (74 of the 100 components) showing point and figure "buy signals" associated with their charts. At tonight's close, this market of 100 stocks is still "bull confirmed," at 85% bullish, with no net change from Friday's close.

I'll be filling in for Jim Brown in tomorrow's Market Wrap and will cover additional indexes, but I really wanted to update some of today's "news" and recent observations regarding new highs, new lows, and the term "buying climax."


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