Wednesday, October 26, 2005

Markets Suffer A Small Distribution Day

Markets finished down on higher volume, though the indexes were only down between .3 to .8%. Higher volume, on a down day, is not something you like to see at the start of a rally but a day here or there with mild declines is normal in most rallies. If the Nasdaq was down 2% today, I would have been worried. But the mild decline looks very normal and nothing to panic over yet.

To give an example of a distribution day popping up after the start of a rally, we can go back to the March 2003 rally. After the 5.9% gain on the Nasdaq giving a follow through day in mid March, the index was hit with a 2.1% drop on higher volume soon afterwards (check your charts). The stock market soon reversed and went on to new highs.

Another thing I want to comment on is the bearishness among traders. Pessimism is getting very thick and redundant in the chat rooms I monitor. Everyone is calling for an outright collapse. My years in the market tells me these guys are ALWAYS wrong. They may be right 6 months from now, but for the meantime the markets are rallying and longs have been very profitable the past week. Another positive development is the Investor Intelligence Survery of Newsletter Writers. The amount of bullish newsletter writers fell for the 5th straight week. This is one of the better contrarian indexes out there and I find it usefull to gauge bottoms when the bulls/bears line gets close to crossing or actually crosses.

I want everyone to understand I am not a raging bull, in this current market. I simply play whatever side the market is favoring. And right now it is the bearish side. Remember, not too long ago I was loaded to the gills on shorts. I favor no side and always find it funny how people can fall in love with the bull or bear side. Both sides are cool with me. But the bears are the most pessimist and angry group of people I have every met in my life. THAT IS THE TRUTH, no matter what anyone thinks. The bears will be bears, I have a feeling for at least another 3 yrs.

New Swing Longs: WOOF SWIR SIGI DIET

Longs Outperforming Market: CRDN RCCC SYNC WIRE PAYX

New Swing Shorts: PRAA ECA

Shorts Outperforming Market: NONE

Small Stocks On Radar Screen: BWCF FLT ACEC JCDA TELN

5 comments:

Anonymous said...

Are we watching the same market? Im an active trader who generally agrees with your views on this blog, but for the first time, I really have to disagree with your bullishness the past week or two. I see a market that was very, very oversold 2 weeks ago, which now has had a shortterm bounce, formed a bearflag, which in turn will lead to lower prices near term. The strongest sectors of the past few years, energy+homebuilders have been in a complete freefall. Tech, which is where the smart money is supposedly rotating to now, doesnt look all that terrific save for a few stocks like the GOOGs and YHOOs. With regard to sentiment, almost everyone i talk and listen to is expecting a year-end rally. When everyone expects something, it usually does not occur. I think we are quietly seeing the credit and real estate bubbles deflating if not crashing here. From people i talk to inside the industry to stock charts I view daily, this view is reenforced. Just look at charts of TOL or NEW or anything else in the real estate or credit industries and tell me something's not wrong. If credit and housing burst, the mkt will not respond kindly. I am in noways a perma-bear, when i think the lows are in, I will be bullish. But, imho, this is one weak market, and the lows of the year have not been made yet.

Joshua "MauiTrader" Hayes said...

Once again, you are trying to predict the future.

I dont disagree we might rollover but right up to today tech has made a lot of money. There are nice charts.

Also you are talking about oil and real estate. Havent I been short these sectors already?? They have cracked and broken down. You are telling me to look at TOL, yet I took a 20% short profit in TOL about a week and a half ago.

Everyone I talk to does NOT expect a year end rally. How can anyone know what is goint to happen that far into the future?

Also I am not BULLISH. The market is bullish. It is the entity that has followed through. Once again, my bullishness, is not mine, it is the current market. If we rollover I become bearish. I am not in the business to predict future but to react to what market gives us each day.

If this is a short term bounce then we will rollover and fail the 50 day moving averages of the indexes. Fine. Then I will increase my look for bullish longs.

Look at the bulls/bears survery. There are too many bears, currently, which HISTORICALLY shows bears are on overextending themselves. This is not MY opinion, this is historical facts.

This market is weak but how do you know we will hit new lows. Do you know something I dont?

If we make new lows trust me there will be plenty of time to make money on the short side.

Did you see Monday, btw? I held over 30 stocks that made 5% moves to upside. That doesnt happen in an oversold bounce. You actually need to have leadership in a sector and last time I checked when techs led that was bullish.

The rotation from oil/real estate will take time. But money from the real estate market will fiind its way into the stock market.

Unless the Fed kills us with rate hikes. Until that yield curve bends, why try predicting the future.

I wonder what ppl were saying five years after the 1928 market?? Oh yeah check your nearest chat room.

Joshua "MauiTrader" Hayes said...

6th paragraph ammendmant: increase looks for bearish shorts

Anonymous said...

This is my follow up to your comments: The sectors you picked are two sub sectors -- one in Tech and the other in Insurance. Without semi's participating in Tech, the tech rally is in trouble. If you want to have a good rally, you should see broader market to move along not just two sub-sectors. I scan everyday 2000+ stocks with average vol > 250k and stocks > 8. In other words I scan a decent market ignoring the speculative ones. Based on my scans, I don't see yet good bases. The stocks that have moved recently are based on their individual performance -- strong earnings. Ex: GOOG, ISRG, RHAT, PAYX, CYMI, FFIV etc.,

If you look at the advance/decline for the last few days, it is horrid. In uptrending markets you should see stocks to go long but I see lot more stocks to short. Make no mistake I am not a bull or bear. FYI, I am long on three stocks. The only thing I can say is, the market is in nauseating trading range and making trading very tough game. Until you see good bases, and S&P, Dow and NASDAQ correct the V formations, I doubt the current move.

BTW, good commentary and I love your blog.

Joshua "MauiTrader" Hayes said...

You know what...you are correct. I can not argue against anything you posted. Especially since all the indexes are below and have failed their 50 day moving averages. I believe the rally will fail, if the Fed hikes rates. Plus if we end the day here down 24 on Nasdaq the rally can be called off.

But the past week I was able to recover all my losses for October in one day by being long the best stocks in the strongest sectors that have made big moves the past 3 months during the turbulent market.

But for the indexes overall once again you are correct with all observations. If your observations are correct and we do make a lower low dont you think the VIX, put/call, bull/bear newsletter will all be in a very high contrarian postion? That will help fuel the next rally.

If we do go lower, which we probably will due to rate hikes, we will probably crash more than drift lower, due to the fact that bearishness is getting very high on the radar screen. The sentiment readings show it and the chat rooms enforce it.

I want to thank you for the wonderful comment. I definitely appreciate your feedback.

You obviously are very good at reading the market. Also love the fact you scan many charts.

P.S. This trading range sucks. But if we study the 1966-1982 markets we can see there were many swings that offered many winners. Look at stocks like CRDN GOOG. I dont think it matters what kind of market we are in when you put up growth numbers like these companies do.