Stocks show broad strength - is a breakout in store?

In last week's post we saw stocks were weakening but we said "don't throw in the towel yet". This week we reaped the rewards of holding steady.

An overview of the short-term technical picture is presented in the following chart of market statistics collected by our Alert HQ process. Each weekend we scan over 7200 stocks and ETFs looking for BUY and SELL signals. We also collect various technical information that we roll up into a chart like the one below:


As can be seen, we plot six different indicators. After this past week's market action we now have all of them moving in a direction that indicates continued strength in the market.

Moving average analysis --

Markets did well this past week and it is clearly reflected in the moving averages. The number of stocks trading above their 20-day moving average rose sharply, increasing by almost 800. Similarly, the number of stocks trading above their 50-day moving average also rose, increasing by almost 600.

We see a continued increase in the number of stocks whose 20-day moving average is above their 50-day moving average. This bullish indicator has continued climbing steadily for 8 weeks now.

All told, between 4000 and 5000 stocks out of about 7200 are trading above important moving averages. There may be some flavor of being over-bought in these numbers but it is undeniable that stocks are exhibiting broad-based strength.

Looking at buying and selling pressure --

Last week we saw some mixed signals from Aroon and Chaikin Money Flow analysis. This week we see consistency across both types of indicators.

The Aroon analysis shows stocks in strong up-trends or down-trends. The chart shows the number of stocks found to be in strong up-trends has increased slightly. The better news, however, is that the number of stocks determined to be in a strong down-trend has decreased, dropping by almost 400.

We also plot the results of Chaikin Money Flow analysis. The number of stocks undergoing strong accumulation or buying has increased from about 1000 last week to about 1100 this week. Not shown on the chart is the number of stocks shown to be undergoing strong distribution or selling. This indicator decreased again last week, with the number of stocks in this category going from 480 down to 440.

Looking at the S&P 500 --

In the chart below we see that the SPDR S&P 500 ETF (SPY) has continued to make good steady progress. As we usually do, we will use SPY as a proxy for the market in general.


We can see on the chart that SPY has held above the downward sloping trend line, the upward sloping trend line and the horizontal support line. SPY almost touched its 200-day moving average during Friday's trade.

Looking at other technical indicators, we see the following:

SPY has a relatively strong DMI reading. Indeed, 182 of the stocks in the S&P 500 are registering up-trends with decent strength according to our DMI analysis.

In terms of Aroon, fully 306 stocks in the S&P 500 are exhibiting strong up-trends. Unsurprisingly, SPY itself is also showing a strong up-trend according to Aroon.

The number of stocks in the S&P 500 whose 20-day moving average is above their 50-day moving average now numbers 358 or almost 72%. SPY also has its 20-day moving average above its 50-day moving average. Indeed, the ETF is pretty much following its 20-day moving average upwards.

Conclusion --

Many financial bloggers have been complaining that recent rally attempts have not been accompanied by adequate volume. The chart shows that recent up volume has not been as strong as the down volume we saw at the January and March lows. Nevertheless, the analysis presented above demonstrates that a large majority of stocks are participating in this recent up trend. Granted, volume is not through the roof. Still, the broad-based nature of the current advance, the confluence of indicators and fairly decent volume all provide a degree of confidence that this rally has further to go.

Having said that, we all know that stocks do not going up in a straight line. I have discussed in a previous post that a new trading range could be in the making and I have admitted in this post that stocks could be over-bought. Regardless of these caveats, everything we have discussed in this post seems to point to continued strength.

For those who watch charts, it can be seen that each of the major averages is currently closing in on its 200-day moving average. If the strength I am detecting continues, we will be seeing each of them break through this important level in the very near future. I would expect that would bring a lot of more buying into the market and maybe even power the averages into positive territory for the first time this year.

Alert HQ for the week ending May 16, 2008

This post is to announce that the latest list of stock alerts is up and available at Alert HQ. Each week we scan over 7200 stocks and ETFs looking for fresh BUY and SELL signals. This week's results are now available.

Oil prices hit new highs this week but major stock averages managed to gain anyway. Sentiment continued to improve as retail sales turned out to be decent, housing starts surprised to the upside and weak manufacturing surveys were shrugged off. As a result, this week we have 16 BUY signals and only 2 SELL signals.

Looking back --

Here are a couple of examples of BUY signals from last week's TradeRadar Alert List and the gains they generated in just five days:

• An oil and natural gas company gained 17%
• A company engaged in the purchasing and managing of charged-off consumer receivable portfolios gained 6%

These BUY signals were on the TradeRadar Alert List one month ago. Here are the gains they generated in just four weeks:

• An insurance company received a buyout offer and is now up 44%
• Another oil and natural gas company has gained 32%
• A telecom company operating in Latin American has gained 26%

Looking ahead --

As usual, later this weekend I will be writing another post to describe my analysis of the market statistics the Alert HQ software has generated. At first glance, it appears that market internals are rebounding after a couple of lackluster weeks. Are we gathering the momentum for a breakout? Stay tuned for the full analysis.

TradeRadar Version 3.0 - Advanced Release Available

As a courtesy to those who use the TradeRadar software and read this blog or subscribe to the RSS feed, I wanted to provide advance notice that the version 3.0 upgrade package is available at the following link:

Download Version 3.0 Upgrade
This download page is not yet public and can only be accessed from this blog post.

Note that this assumes you have installed one of the previous versions of TradeRadar. This upgrade download package includes new or updated components; it is not the full install.

What's new in this version --

The software adds a number of new indicators. Rather than making users become experts on numerous kinds of technical and fundamental analysis, we have extended the simple color-coded system we introduced in previous versions to cover the new indicators. As always, Green is good, Red is bad and Yellow implies caution.

There are several bug fixes and improvements in the trend line angle analysis. You can read the details in the TradeRadar help file that is included in the download package.

Some of the new features are described below:

New technical indicators --

• Aroon - Shows whether a stock is trending or oscillating. Also gives an indication of how strong an existing trend may be.
• DMI - Directional Movement Index. An indicator developed by J. Welles Wilder for identifying when a definable trend is present.
• Chaikin Money Flow - Combines price and volume to show how money may be flowing into or out of a stock.
• 50-day moving average confirmation - indicates where the most recent closing price is in relation to this important moving average
  

As you can see, all the new indicators are most useful for determining trend. Since identifying trend reversals is what TradeRadar is all about, these new indicators will help us decide if the trend reversal is valid.

Fundamental indicators --

The following financial information is now included on the Dashboard screen:

• Market capitalization - useful if you choose to avoid micro-caps, for example
  
• Price/Earnings ratio - can be used as a value indicator, to determine if a stock is too expensive or whether it has earnings at all
  
• Price/Sales ratio - another value indicator, especially for stocks that are not profitable
  
• PEG ratio - price/earnings growth ratio, a value indicator
  

Each has a Red/Green/Yellow signal associated with to indicate level of risk based on the value.

The name of the stock or ETF will also be displayed on the Dashboard now.

Email if you experience problems, have questions or want to provide feedback.

Finally a bottom in NAND pricing?

I have written before about SanDisk (SNDK) and have owned the stock several times over the years. Recently, the stock seems to have bottomed at about $20 and has now rebounded to over $30.

Today's strong move up was due to a bullish opinion on the company from Citigroup's Craig Ellis. He sees the stock hitting $35 based on tier-1 OEM customers poised to provide large orders, more products designing in ever greater quantities of flash (solid-state disk drives, for example) and a supply environment more conducive to firming prices.

Ellis could be right in his call. SanDisk reported earnings in mid-April that were less than expected but revenues that beat expections. Management pointed to tough pricing that kept margins under pressure.

So has NAND pricing finally hit bottom? Let's hope so. To show how serious the pricing pressure has been, the unit price of the benchmark 8Gb NAND flash chips for high-end handheld devices declined to $2.7 from $8 last September. Here is a quick survey of several sources that might shed some light on the subject.

First, we have a report today from DRAM Exchange. Here is the money quote: "demand for NAND Flash will improve as end product makers stock up in anticipation of 2H08 hot season. Because of the reduction and relatively conservative capital expenditures, we expect oversupply in 2Q08 will improve and reach a balanced condition in 3Q08. Subsequently, we expect NAND Flash price to stabilize and gradually rebound as the 2H08 demand increases."

Next we have a couple of reports from the Korea Times. The first one, from 3-27-08, supports our thesis that supply has stopped growing at a rate exceeding demand. The report states that Hynix Semiconductor, the world's No. 2 memory chip manufacturer after Samsung Electronics, said it will curtail its investment in chip production lines in the latter half of the year as unit prices of both memory and flash chips have fallen below the break-even point.

The second report from the Korea Times, posted 4-3-2008, pertains to Samsung. In this case, the manufacturer has said it has no intention of reducing output.

Finally, there was a report from InternetNews.com from 5-9-2008. The title of the post says it all: "Memory Prices Heading Up." The post quotes Nam Hyung Kim of iSuppli as saying that OEMs used inventory from mid-Q1 to mid-April, resulting in very few orders. This also reduced the amount of memory being ordered, which forced memory makers to cut back their manufacturing. "Price is going up because now is the time for OEMs to acquire more inventory," Kim said. "So we are detecting a lot of orders from OEMs that aren't just for now, but so they can build some inventory for the holiday season. Prices are pretty much at the bottom. If we expect prices to go up, then the best time to get it is now."

So once again, have we really seen the bottom in NAND flash pricing?

Despite Citi's Mr. Ellis, I can't agree that the answer is a clear cut "yes". Hynix has stopped investing in more capacity but, as far as I can tell, they have not actually reduced output of current manufacturing capability.

The good news is that demand appears to be increasing. Some of this is a seasonal effect as manufacturers ramp up for holiday sales. As Mr. Kim of iSuppli says "Flash demand is 85 to 90 percent consumer-driven, and consumer demand slowed down due to weak consumer confidence. NAND flash should be more sensitive to the economic conditions."

So we see that finally we are dependent on the stretched consumer to put a bottom in for the NAND industry by stepping up and purchasing electronic gadgets and PCs. This leads us to the question of whether the consumer has the ability to keep spending on non-essentials in the face of rising gasoline prices, falling housing values, a shaky job market, etc. That, I'm afraid, is a discussion for another time.

Disclosure: at time of writing, author has no position in SNDK