How many predicted that the market would break out to new highs within 2 months of staging its worst sell off in several years?  Not many, if any and certainly not me.  The action has been unusual, but given that the market has a way of fooling the majority, not completely surprising.  Quite frankly, technicaly analysis hasn’t been a good predictor of late.  Usually a massive sell off takes time to repair itself (often times by retesting the lows), not indicate that another bull run is around the corner.  Does that mean it’s time to throw price/volume and support/resistance analysis out the window? Heck no!  Technical analys isn’t anywhere to close to 100% accurate, it just provides you with a reasonable probablity of a move in any direction.  It’s without a doubt right on more than dead wrong. 

So where the heck do we go from here?  Oh right, Dow 13,000 as all the headlines are predicting for Monday.  That’s a reasonable assumption, but lets take a step back for a bit and look at what has taken place in terms of the positve and negative.  Maybe then we can make some sense out of this schizo market.  On the positive side, we have break outs in the Dow to a new all time high and a break out in the S&P to a new multi year (and fast approaching its all time high).  This in and of itself is very bullish.  It doesn’t pay to fight it.  Just as you would with the break out of any stock, it’s important to take a look at the bases of the indices that resulted in the break out.  Is it healthy enough to provide a sustained move for the bulls?  The quick answer is no.  The base is V shaped with heavy volume in the left side and little buyer conviction in the right side.  Friday’s bust out move was impressive on the surface, but remember that options expiration and most likely short covering distorted it a bit.   Throw in the fact that the Dow has now risen in 21 of the past 26 days following that key reversal on March 14th and you have conditions that are very ripe for a pull back of some degree.   I have said before that we should expect  the market to test those February lows again before heading higher, but I no longer think that will be the case anytime soon.  A more likely scenario is coming back to test the 50 day moving average and at most the 200 day moving average.  That just might be enough for the market to repair the damage done on February 27th, not to mention provide a great entry point for increasing my exposure on the long side.

At this point, don’t chase the bull and if you have nice profits don’t be greedy.  Lock in some of that and wait for a better entry.

::: Model Portfolio Update :::

It’s been frustrating to continue to sit with half the portfolio in shorts and cash as the market breaks out to new highs, but I’m not going to chase this overbought market and will remain patient..  I’m waiting for the right time to get more aggressive on the long side and that time isn’t now.  I did make a couple transactions last week – I covered one of my shorts in FTEK for an 11% gain and initiated a position on the long side in a top breakout play.  For the week, the portfolio was off .9%, dropping the YTD performance to 6.7% but still ahead of the S&P500.  It continues to be led by my long term core holding in Google which got  a bump after an impressive earnings report on Thursday.  Current allocation is 50% long, 27% short and 23% cash.

::: Best/Worst Performers :::

– Top 10 Performing Industries For the Week –

1. Residential Construction: 9.25%
2. Mortgage Investment: 8.05%
3. Sporting Goods: 6.10%
4. Semiconductor – Broadline: 5.30%
5. Semiconductor Specialized: 5.00%
6. Industrial Equip Wholesale: 4.90%
7. Investment Brokerage – National:  4.80%
8. Farm & Construction Machinery: 4.75%
9. Surety & Title Insurance: 4.70%
10. Credit Services: 4.65%

– Top 10 Worst Performing Industries For the Week –

1. Music & Video Stores: -5.50%
2. Semiconductor – Memory Chips: -3.20%
3. Medical Practitioners: -3.20%
4. Internet Information Providers: -2.05%
5. Savings & Loans: -2.05%
6. Broadcasting – Radio: -1.85%
7. Specialized Health Services: -1.80%
8. Oil & Gas Equip and Services: -1.65%
9. Oil & Gas – Independent: -1.45%
10. Gold: -1.35%

– Top 5 Best Performing ETFs For the Week –
 
1. Ishares Home Construction (ITB)  7.50%
2. SPDR Homebuilders (XHB) 6.80%
3. HLDRS Semis (SMH) 5.10%
4. SPDR Financial (XLF) 4.00%
5. Ishares South Africa (EZA) 3.75%

– Worst 5 Performing ETF’s –

1. HLDRS Internet (HHH)  -4.20%
2. US Oil Fund (USO) -2.85%
3. Central Fund of Canada (CEF) -2.20%
4. Market Vectors Gold Miners (GDX) -2.10%
5. Templeton Russia & Eastern Europe (TRF) -1.90%

:::  IPO’s Worth Watching for This Week :::

1. EDENOR (EDN): Argentina’s largest public electric utility. Known as EDENOR, it distributes electricity on an exclusive basis to the northwestern zone of the greater Buenos Aires metropolitan area and the northern portion of the city. It services about 1 million people. Set to start trading on Wednesday.

::: Upcoming Economic Reports (4/23/07 – 4/27/07) :::

Monday:        None
Tuesday:       Consumer Confidence, Existing Home Sales
Wednesday:  Fed Beige Book, Durable Orders, New Home Sales, Crude Inventories
Thursday:      Initial Claims
Friday:           GDP (adv)

::: Notable Upcoming Earnings Reports I’ll Be Watching This Week :::

Monday:
Grant Prideco (GRP), Core Laboratories (CLB), Amgen (AMGN)

Tuesday:
ENSCO Intl (ESV), Icon (ICLR), Coach (COH), Anixter Intl (AXE), EZCORP (EZPW), Chicago Mercantile (CME), Travelzoo (TZOO), Amazon (AMZN)

Wednesday:
Smith International (SII), SEI Investments (SEIC), Apple Computer (AAPL), Akamai Technologies (AKAM), Allegheny Technologies (ATI), International Securities (ISE), UAL Corp (UAUA), RPC Inc (RES), Corning (GLW), Ryland Group (RYL)

Thursday:
NYSE Euronext (NYX), Microsoft (MSFT), Vasco Data Security (VDSI),  Falconstor Software (FALC), Psychiatric Solutions (PSYS), Silicon Motion Technology (SIMO), Silver Wheaton (SLW), Comcast (CMCSA), Monster (MNST), MEMC Electronic Materials (WFR), Cash America (CSH), TheStreet.com (TSCM), Sunpower Corp (SPWR), Life Time Fitness (LTM), Digital River (DRIV), 3M (MMM), CBOT Holdings (BOT), Beazer Homes (BZH)

Friday:     
National Oilwell (NOV), CTC Media (CTCM), Cameron International (CAM), Baidu.com (BIDU), Cameco (CCJ),

::: Today’s Market Action :::

With traders growing concerned about the strength of the economy and declining earnings, positive news to the contrary (along with some M&A activity) sent markets surging higher today.  The S&P500 busted through resistance to a new multi year high with the last line of resistance at all time highs.  Both the Dow and the Nasdaq are nearing resistance of their February highs. 

On the surface it looked a huge day for the bulls, but volume levels revealed a different story – skepticism and hesitation on the part of institutions.  While volume edged up slightly from Friday in both the S&P and Dow, it was still below average.  I mentioned in the weekend report that the more this market moved up (particularly with below average volume), the greater the risk on the long side.  Considering today’s divergence of price and volume, I still feel that way despite the break out in the S&P.  It’s OK to continue dabbling on the long side, but to get aggressive is a mistake in my opinion.  With key economic reports tomorrow and some big name earnings after the bell, we’re approaching a critical area.  Consider locking in some profits where you have them.

Note: The stockcharts.com server is still down, so no annotated charts again this evening.  I’ll try and post them tomorrow.

::: 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 April 16th 2007

Accumulation in the Dow and S&P.. just barely.

Nasdaq: UP 1.06% today with volume 18% BELOW  average
Nasdaq ETF (QQQQ) UP .92%, volume 42% BELOW average
Dow: UP .86%, volume 8% BELOW the average
Dow ETF (DIA): UP .71%, volume 12% BELOW the average
S&P ETF (SPY): UP .95%, volume 20% BELOW the average
Russell Small Cap ETF (IWM): UP  1.29%, volume 27% 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.  Leading stocks performed well today in terms of price performance, but volume levels indicate that institutions were not pouring money in.  This confirms the lack of conviction in today’s move in the market.

Summary:

* Advancers led Decliners 357 to 67
* Advancers were up an average of 1.93% today, with volume 8% BELOW average
* Decliners were down an average of 1.39% with volume 17% ABOVE average
* The total SI Leading Stocks Index was UP  1.41% today with volume 4% BELOW the 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 guaging 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/industry_tracking/

* Current Leading Sectors/Industries (over last 30 trading days): 
Utilities, Consumer Goods, Networking, Internet, Broker/Dealers, Pharma
                                              
* Current Lagging Sectors/Industries (over last 30 trading days): 
Agriculture, Home Builders

* Today’s Market Moving Industries/Sectors (UP):
Financials, Broker/Dealers, Nanotech, Home Construction, Gold

* Today’s Market Moving Industries/Sectors (DOWN):
None

::: 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.  There weren’t too many top rated stocks breaking out of bases today, so I chose one of the top IPO’s of last year that appears to be on the verge of breaking out –  Divx Inc. (DIVX). 

ABOUT:  DivX Inc. (DivX) creates products and services designed to improve the experience of media. The Company’s product offerings include a video compression-decompression software library (codec) and other consumer software, including the DivX Player application. It also licenses its technologies to consumer hardware device manufacturers and certifies their products to ensure the interoperable support of DivX-encoded content. DivX’s customers include major consumer video hardware original equipment manufacturers (OEMs), including Koninklijke Philips Electronics (Philips) and Samsung Electronics. In addition to technology licensing to consumer hardware device manufacturers, the Company generates revenue from software licensing, advertising and content distribution. In March 2006, DivX acquired all of the assets of Corporate Green, a general partnership that developed an online community platform.

FUNDAMENTALS: Aided by the booming popularity of online video, DIVX had a break out year in 2005 which saw the company swing to its first full year profit in company history.  2006 was even better, with earnings increasing 600% over ’05.  One key characteristic that I look for in top stocks is rising margins and return on equity.  Net margins (at 28%) are outstanding and rising quickly.  Return on equity isn’t exceptional, but very good at around 14%. 

TECHNICAL:  This is a stock that still needs to prove itself to a certain degree.  It’s just now making a move up in the right side of its first base since going public in September of last year.  With sell volume drying up at the bottom and a big gap up above resistance of the 50 day moving average following preliminary earnings guidance above previous estimates, I believe the stock won’t have any trouble breaking out and testing its all time high around 32 over the next few months.  A strong break out above the peak of a double bottom base at 24.21 and I will consider a position.

SELFINVESTORS RATING: With a total score of 51/60 (27/30 for fundamentals, 24/30 for technical), DIVX is a top break out 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 Divx Inc (DIVX).

You have to hand it to the bulls who have shown remarkable resiliency to keep this market afloat.  Following the Fed minutes on Wednesday in which the Fed removed any possibility of a rate hike in the near future (which is what fueled the rally folllowing the Fed decision March 21st), the market sold with some intensity.  It set up the likelihood that, at the very least, the major indices would take out support of the 50 day moving averages.  But there were buyers again stepping in and taking the market higher Thursday and Friday, albeit with uninspiring volume. 

From what I’m seeing, as the market comes close to retesting its previous highs, many traders have all but forgotten the big sell off on February 27th.  What’s important to remember is that technical damage of that magnitude doesn’t just disappear.  It takes time to repair the damage – done with a lengthy sideways consolidation and/or a retest of those lows.  This hasn’t happened.  YET.  It will.  Maybe we continue push to the highs of February, but the closer we get to those highs, the greater the risk on the long side.  Play accordingly. 

Next week is a big week with earnings kicking off in full force.  With housing starts, building permits, CPI data and several earnings reports, Tuesday could provide an important clue as to where this market is headed.

I’ll post an analysis of the charts of the major indices tomorrow night.

::: Model Portfolio Update :::

It was another fairly quiet week for the Model Portfolio in this directionless market.  I’m not doing a whole lot on either side right now but did close out a few positions and replaced them with what should be stronger ones.  I closed out my TIE position for a small 5% gain and replaced it with a top Chinese play.  Also closed out were 3 Quick Strike Profit plays that while still fairly bullish, were showing enough weakness for me to cut and run.  With the market still needing to repair significant damage and likely to see further selling at some point, I’m moving on at any sign of weakness, however small.   Closed were JAV (+5%), TTG (-3%) and MFN (-2%).  These were replaced with 2 other QSP plays, both of which remain profitable.  For the week, the portfolio edged up just .1% and stands firm with a 7.6% YTD return.  Current allocation remains a bit on the bearish side with 40% long, 35% short and 25% in cash.

::: Best/Worst Performers :::

– Top 10 Performing Industries For the Week –

1. Railroads: 6.75%
2. Recreational Goods: 4.85%
3. Long Term Care Facilities: 4.50%
4. Technical Services : 4.45%
5. Heavy Construction: 4.35%
6. Copper: 4.25%
7. Silver:  4.15%
8. Nonmetallic Mineral Mining: 4.15%
9. Manufactured Housing: 3.85%
10. Oil & Gas Equipment & Services: 3.65%

– Top 10 Worst Performing Industries For the Week –

1. Advertising Agencies: -3.75%
2. Toy & Hobby Stores: -3.05%
3. General Entertainment: -2.60%
4. Auto Manufacturers: -2.20%
5. Pollution & Treatment Controls: -2.05%
6. Residential Construction: -1.85%
7. Diversified Computer Systems: -1.85%
8. Savings & Loans -1.80%
9. REIT – Hotel/Motel: -1.80%
10. REIT – Residential: -1.65%

– Top 5 Best Performing ETFs For the Week –
 
1. Morgan Stanley China (CAF)  5.20%
2. Central Europe and Russia Fund (CEE) 5.15%
3. Morgan Stanley India (IIF) 5.00%
4. Central Fund of Canada (CEF) 4.40%
5. India Fund (IFN) 3.80%

– Worst 5 Performing ETF’s –

1. Japan Small Cap (JOF)  -3.80%
2. Herzfeld Caribbean Basin (CUBA) -1.40%
3. Ishares Japan (EWJ) -1.15%
4. HLDRS Retail (RTH) -1.00%
5. US Oil Fund (USO) -.95%

:::  IPO’s Worth Watching for This Week :::

1. MetroPCS Communications (PCS): provider of wireless broadband personal communication services. The company offers service on the basis of no long-term contract, flat-rate, unlimited usage in selected major metropolitan markets in the United States. The company serves over 3 million customers in the San Francisco, Miami, Tampa/Sarasota/Orlando, Atlanta, Sacramento, Dallas/Ft. Worth, and Detroit metropolitan areas.  The company is profitable and will begin trading on Thursday.

2. Simcere Pharmaceutical Group (SCR): China-based manufacturer and supplier of branded generic pharmaceuticals in China. The company  manufactures and sells 35 pharmaceutical products, including antibiotics, an anti-cancer medication and an anti-stroke medication. Simcere also has 12 product candidates in various stages of development, including treatments for cancer, cerebrovascular diseases, infections, rheumatoid arthritis, nasal allergies, nausea and vomiting associated with chemotherapy.  Profits and sales have increased significantly over the past year.  Trading set to begin on Friday.

3.  Superior Offshore International (DEEP): provider of subsea construction and commercial diving services to the crude oil and natural gas exploration and production and gathering and transmission industries on the outer continental shelf of the Gulf of Mexico.  Profits and sales have more than tripled over the past year.  Trading set to begin on Friday.

::: Upcoming Economic Reports (4/16/07 – 4/20/07) :::

Monday:        Retail Sales; Business Inventories
Tuesday:       CPI; Housing Starts; Building Permits; Industrial Production, Capacity Utilization
Wednesday:  Crude Inventories
Thursday:      Leading Indicators, Initial Claims
Friday:           None

::: Notable Upcoming Earnings Reports I’ll Be Watching This Week :::

Monday:   None
Tuesday:  Steel Dynamics (STLD), EMC Corp (EMC)
Wednesday: Ebay (EBAY), Alliance Data Systems (ADS),
Thursday: Google (GOOG), Cybersource (CYBS), Schering Plough (SGP), United Health (UNH)
                   CBOT Holdings (BOT)
Friday: Schlumberger (SLB)