Overbought, but not weakening. Plus- VanceInfo (VIT)

July 20, 2009 by Kenneth Reid

The first installment of quarterly earnings reports last week was good enough to scare the bears and convert another portion of skeptics to believers in the improving fortunes of the economy. 71% of companies reporting have beaten analysts' expectations, which is better than the standard 61% rate; but naturally, expectations were in the gutter.

More importantly, the guidance from several bellwethers was upbeat, igniting the best weekly gain in the Dow since March. The 7.3% advance completely erased the previous four week slide, putting the large-cap averages back to the June highs. Leadership for the week came from the same three engines that powered the blistering March-June rally: metals & mining (+14%), financials (+9%), tech (+8%) and retailers (+8%).

Meanwhile, a bubble-like mentality in the Asian Pacific region is helping boost animal spirits. Impressive growth in the Chinese economy has the MSCI Asia Pacific Index now trading at 43 times trailing 12-month reported earnings, up from a 15 X valuation at the market’s trough in March. Does this remind anyone of the Nasdaq in 1999? It should.

As I noted last week, the Nasdaq is breaking out above its June highs, which puts the $41 area in play as a target for the QQQQ. Due to the previous selling panic in the index last October-November, the area between here and there is a “high speed zone.” Price is likely to advance through it very quickly, with few pauses or pullbacks. Thus, the stubborn bullishness evidenced in today's price action despite the general overbought conditions.

Today, some of the Chinese "rocket stocks" again have trader interest. VanceInfo (VIT), up 15%, has closed the bearish gap from 7/6 and is squeezing shorts. We bought the dip in this stock on 7/14 in TSR Pro and continue to hold it. Given the bullish state of the Chinese economy, I recommend holding Chinese rockets through earnings announcements.