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Sunday, April 26, 2009

Weekly Review - tech leads the way to new highs, will others follow?

Stocks weakened a bit this week but for the most part held their gains. There were fractional losses on all the major indexes except for the NASDAQ which managed to advance 1.3% and has now achieved seven straight weeks of gains.

Earnings season, of course, is in full swing and things are as confusing as I've ever seen them. One news report will describe how a company saw a huge decline in earnings and revenue and another news report will focus on how the same company beat expectations. Overall, investors are still in the "glass is half full", "things could be worse" mode and are grateful that the majority of earnings surprises have been positive.

This has especially been true among tech stocks; hence, the strength in the NASDAQ. Among the notable companies with well-received earnings this week we had Apple, Microsoft, eBay and Amazon.

On the other hand, financial stocks, while turning in earnings that are better than most expected, are still facing headwinds from ever-expanding loan loss reserves and the soon to be revealed bank stress tests. In the meantime, concerns about commercial real estate keep rising and increasing the worries about the effects that will have regional banks. (Hard to understand why many REITs keeping rising but that's another story)

In terms of economic reports, investors have become blasé about weekly initial jobless claims staying stubbornly above 600,000. The fact that the numbers are steady rather than rapidly increasing is providing hope for the labor market. Existing home sales were down again but new sales beat expectations. Durable goods orders fell again but only by 0.8% whereas economists were expecting a 1.5% decline. Overall, there was nothing horrible enough to cause investors to abandon stocks and snuff out the current rally.

As always, I want to present our usual two charts to demonstrate the state of the overall stock market.

TradeRadar Alert HQ Stock Market Statistics --

Each week our Alert HQ process scans almost 7300 stocks and ETFs and records their technical characteristics. The following charts are based on daily data and presents the state of some of our technical indicators.

This first chart presents the moving average analysis for the entire market and contrasts it with the performance of the S&P 500 SPDR (SPY). When the number of stocks trading above their 50-day moving average (the yellow line) crosses the line that tracks the number of stocks whose 20-day moving average is above their 50-day moving average (the magenta line) there is an expectation that you will get a change in the trend of the S&P 500.

SPY versus the market, Moving Average Analysis, 04-24-2009
This chart shows that the strength in market is moderating only slightly. We've had a few stocks fall below their 50-day moving average but for the most part, stocks are still moving up, just more slowly.

This next chart is based on Aroon Analysis and compares our trending statistics to the performance of SPY. We use Aroon to measure whether stocks are in strong up-trends or down-trends. The number of stocks in down-trends is indicated by the red line and the number of stocks in up-trends is indicated by the yellow line.

SPY versus the market, Trend Analysis, 04-24-2009
Here we see a very slow continuation of last week's moves: a few more stocks in down-trends and a few less stocks in up-trends. Strength is moderating on this chart, too, but the move is nowhere near alarming yet.

Conclusion --

For those who feel the bottom is in and we are in a new bull market, there is so far nothing in the charts to dispute that. On the other hand, for those who think this is just a bear market rally, there is nothing in the charts to dispute that either.

When looking at major market indexes, none of them have gotten close to crossing above their 200-day moving averages. Bears point to this as evidence we are still in a bear market.

I take some comfort, however, in the fact that I am starting to see a number of individual stocks who are close to or are already above their 200-day moving average. A couple of months ago, that would have been a true rarity so it must be interpreted as a positive to see some leadership emerge (some of these are listed on our Trend Leaders page).

The big story this coming week is still earnings but there is also a decent selection of economic reports coming up including: Consumer Confidence, CaseShiller Home Price Index, Advance GDP for the first quarter, the note of the last FOMC meeting, crude inventories, initial jobless claims, personal income, personal spending, Chicago PMI, factory orders, ISM Index and auto and truck sales. Some of these are important but I have a hard time thinking any of them could cause a real market rout.

Last week I wondered whether we would see the return of fundamentals as a driving force in the market. It does seem as if that is happening as earnings are indeed turning out to be decent enough to keep the market pretty close to its recent highs. As long as the financials don't throw us a curve, it seems the possibility of a retest of the March lows may be receding. Let's keep our fingers crossed and our stops tight.

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