Oversold Month-End Window Dressing Market Rally: Dave's Daily

This is classic manipulative stuff and in many ways is due to high frequency trading where news matters little! But, hey, it is what it is.
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Sure China said they wouldn't be selling European bonds. Why wouldn't they say that? They didn't say they'd be buying more either. So what was the news to account for this stock market rally Thursday?Good economic data? No. GDP data came in significantly below estimates. Good Jobless Claims data? No, not really. While claims were somewhat lower than the previous week they were still below consensus and crawling along the bottom.

So what then?

Ah, I think I have it. Markets were much oversold (see previous NYMO readings) and the month-end is at hand so some tape-painting window dressing was to be expected. Toss-in a long holiday weekend at hand and many traders will be heading out the door early. This is classic manipulative stuff and in many ways is due to high frequency trading where news matters little! But, hey, it is what it is.

Again, markets are melting up on lighter volume repeating an old pattern. Breadth was extraordinarily positive no doubt putting in a 90/10 day.

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The NYMO is a market breadth indicator that is based on the difference between the number of advancing and declining issues on the NYSE. When readings are +60/-60 markets are extended short-term. Markets no longer oversold short-term.

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The McClellan Summation Index is a long-term version of the McClellan Oscillator. It is a market breadth indicator, and interpretation is similar to that of the McClellan Oscillator, except that it is more suited to major trends. I believe readings of +1000/-1000 reveal markets as much extended.

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The VIX is a widely used measure of market risk and is often referred to as the "investor fear gauge". Our own interpretation is highlighted in the chart above. The VIX measures the level of put option activity over a 30-day period. Greater buying of put options (protection) causes the index to rise. Markets are now beginning to calm down but let's not say troubles are over yet.

Continue to Major U.S. Markets

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SPY:

We could just leave it here I suppose but this is one of those days where you're grateful just to do charts and not make sense of things. The bottom line for SPY and most indexes was support on weekly charts held. That's about all you can say.

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MDY, IWM:

The risk trade was back on the front burner as mid and small caps put on strong performance based on nothing I can discern. But the tape tells the story.

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QQQQ:

The usual suspects (AAPL, INTC and even MSFT) pushed tech higher today.

Continue to U.S. Market Sectors, Selected Stocks & Bonds

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SMH, INTC:

Semi's are natural tech leaders and should always remain first on your view list. Intel is obviously king of the sector.

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AAPL, MSFT

: Does it matter to you which is the bigger company? It shouldn't. Apple is obviously killing all competition. I think of MSFT as a utility with declining customer demand and no dividend. Why they don't pay a large dividend, especially before dividend tax law changes is beyond me.

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XLF, C, GS:

Financials reversed course along with everything else today on basically little news. The powers that be bought stocks in the sector off the edge of the cliff.

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XLV:

A major technical victory with only one more day to go in the week. Support holds.

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XLB:

I know some must think these little blue lines seem silly sometimes until they prove on the mark. Bows humbly....

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XLY:

Why is Ford even in the index? I pondered this yesterday and still have no clue. Not a discretionary item is it?

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IYR:

Yesterday I drew a very tight range thinking it wouldn't last. That was right and now previous resistance is support.

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IYT, CSX:

Transports seem to be pausing within support and climbing back strongly from previous selloff. CSX is a trucking company and well represents the core of the index.

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IEF, TLT:

The risk trade comes off the table as many square-up positions before the long weekend.

Continue to Currency & Commodity Markets

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$USD/ DXY, UUP:

The dollar has been on a two-way street the past two weeks. One day the euro is going to collapse and the next they do something to help it out.

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FXE:

One day it looks dead, the next day we're seeing some rescue effort whether politically or from other sources.

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GLD:

The big news is GLD filed a shelf registration or secondary issue of 239.3 million shares. As of May 26, 2010 390.4 million shares were outstanding making the new offering a 60% increase. Is this driven by demand from call options like UUP was forced to issue two secondary's to cover the needs of options specialists? This also means GLD will acquire another $28 billion of gold at current prices. Heady stuff and demand must be very strong.

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DBC:

Commodity prices rose substantially abetted by a strong rise in energy prices.

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$WTIC/CRUDE OIL:

It seems that with the dollar a little less robust oil prices can rise. Perhaps tensions in the Middle East will rise, the Nigerian rebels will be let loose or Chavez will do something typically stupid.

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XLE:

As they say in the army training manual; first thing stop the bleeding. In oil spills and other such disasters the next thing; call the lawyers.

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DBB:

Like everything else, base metals caught a bid today.

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XME:

Good sized pop in miners today with rise in stocks, base metals and other raw materials.

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Continue to Overseas & Emerging Markets

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EFA:

Spain passes some austerity measures and so far no riots. It's only been one day though.

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EEM:

How many hockey goalies does Mr. Market have on his team? 

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EWY:

The little man in the high heels is a dangerous lunatic with nukes. Nobody wants to do anything about his murdering ways.

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EWZ:

Rising commodity prices lifts most EM markets including Brazil.

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IEV:

The S&P Euro 350 accurately reflects how scary things are in Europe overall. Now today's stick save is merely based on the vote in Spain and some idea the Chinese won't be selling Euro denominated bonds.

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FXI:

Is China "the" safe haven? Some think so but the markets within China are in a bear market for now anyway.

Continue to Concluding Remarks

We've been going through some very fast markets abetted buy program trading and now high frequency trading (HAL 9000 algos). The two combined constitute 70% of total market volume. So, when we say trading desks and hedge funds dominate markets today we're not kidding.

These are turn-offs to most investors and even many technicians since their activity distorts the normal flow of business. For the average retail investor markets have become a casino-like spectacle and they'd rather do something else.

Markets Thursday put on an amazing show albeit on lighter volume. It may have been a pre-holiday close out for shorts and some window dressing for the powers that be; but, that's just my opinion.

I'm not surprised by the rally since the $NYMO and other indicators were screaming "oversold". This is why we don't enter short positions when markets are in this condition. It's more important to stand aside in cash even though that's unsatisfying and unrewarding. But sometimes you have to know when to be involved or not. We've been fortunate that most portfolios are near 100% cash and have been for a few weeks now.

What's next? We won't know until June, but hey, that's just around the corner.

Let's see what happens. You can follow our pithy comments on

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Disclaimer: Among other issues the ETF Digest maintains positions in: MDY, IWM, QQQQ, UUP and GLD.

The charts and comments are only the author's view of market activity and aren't recommendations to buy or sell any security.  Market sectors and related ETFs are selected based on his opinion as to their importance in providing the viewer a comprehensive summary of market conditions for the featured period.  Chart annotations aren't predictive of any future market action rather they only demonstrate the author's opinion as to a range of possibilities going forward. More detailed information, including actionable alerts, are available to subscribers at

www.etfdigest.com

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Dave Fry is founder and publisher of

ETF Digest

, Dave's Daily blog and the best-selling book author of

Create Your Own ETF Hedge Fund, A DIY Strategy for Private Wealth Management

, published by Wiley Finance in 2008. A detailed bio is here:

Dave Fry.