Wednesday, July 25, 2007
Behind The Feeding Frenzy
by David Yu
Amazon.com surged more than 24% on huge spike of volume that's about 350% of its regular trading volume. The after-hour trading is no less theatrical. Both Baidu (BIDU), the Chinese Internet search provider, and Apple went up approx. $35 and $13 respectively. Apple's after-hour trading was halted at first due to initial selloff on large volume when the earnings report came out. At their current price level, BIDU's selling at 69 times its 2008 earnings, and AMZN is selling at 66 times its 2008 earnings. The way these shares are getting snatched up shows little fear in investors' appetite for the high-flying tech stocks. But that's not what the market's telling us.
For one thing, one of the untold stories today is that 756 stocks on all 3 major exchanges made new lows while only 115 reached new highs. Over the past 2 sessions, there were 1,438 new lows and only 270 new highs. In fact, my 3-month NHNL (new high vs. new low) MACD Index (thick black line on Chart 1) had just crossed below its 9-day moving average (red line) on 7/19/2007. Coincidentally, that's the same day the Nasdaq topped out at 2,724.74, a 6.50 year high.
My NHNL MACD Index is currently at minus 0.08, which is lower than the previous lows in May and June. And, yes, past performance shows that it could go much lower. During the 15% Nasdaq correction that started last April/May, this index fell below minus 0.30. Of course, it could also reverse the trend and move up. But being in the negative territory with the 9-day moving average turning down, it may take a lot to pull this baby back up. What's the path of the least resistance???
Chart 1
And, nothing indicates the market's apprehension better than the CBOE's VIX Index, or the option traders' fear index (Chart 2). This index has been rounding the bottom and crawling higher since April. That's unusual. The VIX was actually trending lower prior to last April/May correction period and the recent Feb 27 plunge caused by the selloff in China (see blue arrows).
Chart 2
Despite yesterday's 226 point DJIA selloff, the VIX continues to make higher lows. This shows that traders are still seeking protection from the potential downside. They believe there's a probability that the worst is yet to come.
So, behind the feeding frenzy of a few tech shares, we're seeing larger number of stocks hitting new lows than new highs. And we're seeing elevated fear in the market. It's just a matter of how long AMZN and the likes are capable of holding it all together.
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