At the top of the page in IBD it says "Friday’s stronger than expected jobs report show a recession is likely off the table, propelling stocks to record highs."  Maybe it’s just me but how can any assumptions be made about a jobs report?  Wasn’t it just one month ago after a horrible jobs report that recession talk was swirling in the air?  Oh, right, that was a mistake.  Actually, there was significant job growth in August.  A revision upward and all is good… and that September report just confirms that the August jobs report was inaccurate.  Rigghhhhtt.  Don’t even get me started on inflation.  Can’t we all just finally admit that the economic numbers released by the government are a bit of a joke at this point?  To me there are really only two things that matter – company sales growth (not as easily manipulated as earnings) and supply and demand in the stock market.  Since company sales growth is a LAGGING indicator (hey, sales growth is typically best at the TOP of the market and worst at the bottom), I’ll base my trading decisions on simple supply and demand of the stock market.  For that I turn to the charts.

On Friday the S&P joined the Dow up in record high territory while the Nasdaq continues to push higher without pause.   That big August capitulation day has proved to be a much stronger springboard than I ever imagined.  If you told me a month ago that the market would shoot nearly straight up to record highs with little pause I wouldn’t have believed it.  The fact that the market has busted through to new highs is in and of itself very bullish action and makes for headlines.  This can bring in more retail money off the sidelines and push us higher.  However, until the institutional money starts pouring in, this market rise remains a house of cards. 

Notice how as the Dow pushes to record highs, but volume behind the move recedes.  The market looks tired up here and at the very least needs to take a breather and spend some time sideways.  At worst, this is the end of the road and marks a double top.  I don’t think that will happen, but it’s something to keep in mind.

The S&P  closed at a record high on Friday with volume higher than the day before.  Yes, technically it was a day of accumulation.  But again, look at the lack of institutional buying up here.  Volume levels were well below average and have been for a few weeks.  Throw in the steep rise over the past several weeks and I think you have a recipe for a significant pull back from here.  This market needs a rest so that it can coil the spring for another leg up.

The volume levels in the Nasdaq are a bit better and the move on Friday was impressive but expect the Nasdaq to come back and test the new level of support at those July highs at some point before heading higher.

The bottom line right now is that this market has risen fast and furious off that capitulation day, but is looking increasingly tired up here.  The market needs to rest and recoil the spring so that it can sustain another leg up.  Until then, I’ll continue to sit on a sizable cash position and look to trade shorter time frames. 

::: Model Portfolio Update :::

For a few months I hadn’t been playing too many of what I call QSP (quick strike profit) trades which are basically swing trades where I’m looking for big profits in momentum stocks in a very short time frame.  However, while the market has gained strength over the past several weeks I’ve begun to play these quite a bit more and this week the strategy paid off in a big way.  My strategy with them is to cut them loose at the first sign of stalling and/or weakness even if I have a gain in the stock.  Case in point – my trades in SCON and KONG.  Both stalled out after a breakout attempt so I dumped them for small gains of 3%.  Another great example is a trade in Cardica (CRDC) which I’ll highlight in a case study in another post soon.  CRDC is a stock I initiated a position in last Friday when it looked as if it was going to emerge from a very bullish looking triangle formation.  When it stalled on Monday and Tuesday, I dumped it for a small 1% loss.  If at first it doesn’t succeed.. TRY, TRY again.  I tried again on Thursday when the stock began to show new signs of life late in the trading day.  I initiated an entry at 10.17 and rode it up for much of the day on Friday and locked in a very quick 45% gain.  My only regret is initiating such a small position 🙁 The KEY: cut your losses quickly in these volatile plays and eventually that one big run will wipe out a few small losses and really accelerate your returns.  In addition to some nice gains in QSP trades recently, the portfolio continues to be led by Google (GOOG) a long term holding as well as IPO plays LULU and WX.  For the week, the portfolio surged to a 4.3% gain bringing the YTD gain to 15.6%.  Now that certainly isn’t world beating performance, but as I’ve said before, the market has been unusually difficult to read this year and I missed much of the move in the first half of the year.  I feel like now I’m catching up and in great position to at least double the return of the S&P by the end of the year just as I did last year.  I’m still carrying a decent cash position at 32% and probably won’t move too much more to the long side until we get some kind of pullback/consolidation. 

In my weekly report yesterday I mentioned I was waiting for a low volume move down to key support levels OR a big breakout to new highs to get more aggressive on the long side.   I was not expecting a breakout move to happen so soon especially with the news out of Citigroup in the morning but today we got the big breakout.. or did we?  Apparently traders feel the credit crunch will be a fairly isolated event (even Citigroup said earnings would be back to normal in the 4th quarter after a 3rd quarter hit) and with the Fed there to brace the fall every step of the way.. why not bid up up the market!  The price was there and the Dow and Nasdaq broke out from key resistance levels to new record highs.  BUT WHERE WAS THE VOLUME??  Since volume levels were higher than Friday, today’s move was technically a day of accumulation.  However, considering volume levels were below average across the board it’s clear that institutions didn’t do a whole of participating in today’s rally.  It seemed to be more of a case of the retail side fearing missing the next move up and some short covering.  Considering that the market is being led by commodities (no, Gold shouldn’t lead the way in a bull market) along with overbought conditions quite frankly I’m becoming skeptical of this rally.  I’m continuing to play it with small long positions and added a couple more today but I’ll be vigilant about looking for more warning signs and even more vigilant about protecting my profits.

 
::: Major Indices Performance – The Numbers :::

(Note: volume averages are based on the average over the past 50 days)
Data as of 4:00EST – End of Day October 1st 2007

Nasdaq: UP 1.46% today with volume 5% BELOW  average
Nasdaq ETF (QQQQ) UP 1.15%, volume 32% BELOW average
Dow: UP 1.38%, with volume 4% BELOW the average
Dow ETF (DIA): UP 1.22%, volume 47% BELOW the average
S&P ETF (SPY): UP 1.13%, volume 36% BELOW the average
Russell Small Cap ETF (IWM): UP 2.49%, volume 20% BELOW the average

::: SelflInvestors Leading Stocks :::

The Self Investors Leading Stocks Index is comprised of stocks in the Breakout Tracker, which is a database of the fastest growing companies near a breakout or having already broken out of a base.  Small to mid cap leading stocks led the way today as the Russell 2000 and the Self Investors Leading Stocks index greatly outperformed the major indices.

Summary:

* Advancers led Decliners 284 to 50
* Advancers were up an average of 2.71% today, with volume 2% ABOVE average
* Decliners were down an average of 2.05% with volume 59% ABOVE average
* The total SI Leading Stocks Index was UP 1.99% today with volume 10% ABOVE average

::: Where’s the Money Flowing :::

Many investing websites provide leading industries based on price performance alone. However, without accompanying volume levels, this can sometimes be misleading.  The only way that I know of to gauge industry/sector strength WITH volume levels is through the analysis of ETF’s.  A couple years ago this was not possible, but as more traders/investors use ETF’s they become a much better tool for gauging the health of the market and seeing where the money is flowing (or not flowing).  Using the proprietary SelfInvestors Demand Indicator score which measures price and volume movements, I’m able to quickly see which sectors/industries are seeing the greatest inflows of cash.  For a detailed look at how I go about gauging sector/industry strength please see the following post: http://selfinvestors.com/si/industry_tracking/

* Current Leading Sectors/Industries (over last 30 trading days):  
Gold, Gold Miners, Agriculture, Software, Technology
                                          
* Current Lagging Sectors/Industries (over last 30 trading days): 
Retail, Homebuilders

* Today’s Market Moving Industries/Sectors (UP):
Home Construction, Semis, REIT, Nanotech, Transports, Pharma

* Today’s Market Moving Industries/Sectors (DOWN):
Commodities

::: Stocks :::

The stocks section will be an area where I highlight one stock selected from a group of stocks moving up with volume well above average and most likely breaking out of a base or consolidation.  Today’s stock is First Solar (FSLR), a top solar play which broke out of its first significant base since going public.  Yeah, it’s hard to believe a stock could run more than 500% without carving out a significant base along the way, but that’s been the case with many solar stocks.  For this reason I DO NOT adhere to the rule that says you should wait to initiate a position in an IPO until it carves out its first base.  The best IPO’s often don’t carve out a decent base until AFTER they have run up 50-100..-500%!

ABOUT: 

First Solar, Inc. (First Solar) designs and manufactures solar modules using a thin film semiconductor technology. The Company manufactures its solar modules on high-throughput production lines. Its solar modules employ a thin layer of cadmium telluride semiconductor material to convert sunlight into electricity. In August 2006, First Solar completed its Ohio expansion, adding two 25 megawatt production lines to its existing 25 megawatt base plant. The Company describes its production capacity with a nameplate rating, which means minimum expected annual production. It assigns each production line a 25 megawatt nameplate rating. With the completion of its Ohio expansion, First Solar has an annual manufacturing capacity of 75 megawatt. The Company is also building a four line 100 megawatt plant in Germany. During the fiscal year ended December 30, 2006, First Solar entered into long-term solar module supply contracts with six European project developers and system integrators.

FUNDAMENTALS: 

Like all solar companies, First Solar (FSLR) has been posting extraordinary sales and profits over the past several quarters and posted its first full year profit last year.  This year profit growth is expected to explode nearly 1000% over 2006.  No wonder the stock has soared over 500% since going public just over a year ago.  Net margins are excellent at around 26% but Return on Equity is disappointing at around 2%.  Not what you want to see in a leading company.  While First Solar (FSLR) isn’t currently the strongest solar company fundamentally, it’s often touted as the one with the greatest potential.  First Solar (FSLR) should certainly be near the top of any breakout watch list right now.

TECHNICAL:  

Following a huge run like FSLR has had I like to see a much larger, smoother base form than the one that FSLR has formed over the past few months.  However, given the industry it’s in (solar is still hot) and the growth, today’s breakout should not be ignored.  What I would do to decrease the risk of an entry is avoid initiating a position on the breakout and see how the stock performs over the next several days.  Does it continue spiking higher with heavy volume, then pull back to near the breakout point (at 123.31 with light selling volume)?  This is an indication that the breakout is strong and will undoubtedly hold up.  You can bet I’ll be initiating a position of my own in this case. 

SELFINVESTORS RATING: With a total score of 50/60 (26/30 for fundamentals, 24/30 for technical), First Solar (FSLR) is a very good SelfInvestors breakout candidate.

Full Disclosure/Disclaimer: The stock of the day is by no means a buy recommendation.  Please do your own research and make a personal decision based on your own tolerance for risk.  I currently do not own a position in FSLR.

 It was a fairly ho hum week with light trading volume as the market awaits the kick off of earnings season in a couple weeks but market reactions to news events suggest the bulls still remain in control as key technical resistance levels at the July highs come into play.  Retail warnings from Target and Lowe’s, weaker than expected housing numbers, a big drop in consumer confidence and record high oil was tempered by tame inflation (at least according to the government) and strong manufacturing data.  Clearly, the market focused on the good news last week and that is characteristic of any bull market.  However, I think most traders are waiting for some kind of big confirmation move after the Fed induced surge nearly two weeks ago before getting aggressive on the long side.  My own strategy hasn’t changed from last week.  I want to see a confirmation breakout move above the July highs OR some significant light volume selling to support levels before moving more cash to the long side.