After a sharp rally off the lows of two weeks ago, the major indexes held in relatively tightly on Friday as volume receded. Considering the steepness of the rally, this action is constructive. Where the major markets head from here will be determined by whether quantitative easing can overcome any negative news. So far this year, the markte has shrugged off bad news, thus corrections have been contained to within 4% before the market has managed to move to higher-highs. The Market Direction Model has remained on a buy signal, and with futures up again this morning there is little evidence to suggest a change of signal in the short-term.
Meanwhile, leading stocks such Amazon (AMZN), which fell more than 6% on a weak earnings report, as well as Baidu (BIDU) and Expedia (EXPE), both of which also gapped-down after earnings continue to falter. The question, however, has been whether this sort of selling spreads or whether it simply leads to rapid rotation into other areas of the market. So far this has been the case, and in the face of weakness in names like AMZN and BIDU we see AAPL attempting to move up off of its recent lows below the $400 price level. AAPL remains some 40% off its high, with the market showing no significant reaction to last week's earnings announcement. Technically AAPL remains in a downtrend, under both its 50-day and 200-day moving averages, but the weekly pattern shows three separate downside waves which could imply a rebound attempt from current levels, and this would certainly serve to bolster the NASDAQ Composite Index in any attempt to retake multi-year highs.
Housing stocks have been acting like schizophrenic stepchildren, with many of the leaders violating their 50-day moving averages with diarrhetic regularity. Thus D.R. Horton's (DHI) gap up on a strong earnings report last Friday should be regarded with some suspicion and caution, particularly coming straight up off the bottom of its base formation. Lumber Liquidator (LL) might be considered in a similarly cautious manner, given that it has violated its 50-day moving average twice since December 2012. Other homebuilding stocks like PHM, OCN, RYL, and LEN are showing similar action, and when stocks trade in such a sloppy manner, they pose more risk, thus this group whose group rank has been all over the map over the last few months, might be avoided. In our view, should the market trend continue, there are other names and areas of the market to play.