Saturday, May 13, 2006

Stocks Fall Again, On Heavy Volume; Didn't Your Mom Tell You Not To Play With Knives?

Stocks continued the trend that they established on Thursday, with the SP 600 leading the way down again with a 1.89% cut. The NYSE fell 1.4%, the Nasdaq fell 1.3%, and the Dow Jones Industrial Average fell 1%.

Volume was higher on the NYSE, giving it two distribution days in a row. The Nasdaq's volume was lower but still well above average. So it is hard to find anything positive about the index just because the volume was lower than yesterday. It was still an ugly day.

Breadth was bad all around, with the NYSE decliners leading advancers by a 4-to-1 margin; the Nasdaq was 3-to-1 negative. Like I said on Thursday, this kind of negative breadth by such a large margin is indicative of a market being near the end of a selloff. However, for breadth to be this bad just when the indexes start their selloff is very odd indeed. I wish I had historical data on that. I know it is out there I am just not going looking for it now.

Something to support that argument might also be the put/call ratio. It spiked to 1.12 intraday, on Friday. This is another side-indicator that signals we are near the bottom not the beginning of a downtrned.

Now take that info and then listen to this. It is obvious the markets are just NOW starting their correction (Thursday) and that NOW is the time to get defensive. All the parabolic charts, laggards breaking out and failing, and lack of quality stocks showing up all signals this is the start not the end. Also without any high quality stocks holding up--IBD 100 fell 3.8% on Friday--and no new CANSLIM stocks setting up it is a sign that the downtrend is just beginning not ending.

Therefore we have conflicting signals. So you would think! But price and volume takes the top priority. The signals via individual charts and the indexes indicate it is time to take a defensive measure, not try to GUESS at when we are going to bottom, and keep cash on hand for when we ACTUALLY bottom. Does the term grabbing a falling knife ring a bell. If it doesn't: it means don't try to bottom pick stocks. WE DON'T DO THAT! We buy strength in bullish markets. We don't buy "bargains" when the markets are rolling over. Period! I will not answer any questions on any stock having a pullback as a new long. I don't recommend buying in down markets, period.

It was a wild week indeed. It was the worst week for the markets since the week before the rally began in October. Back then everyone was bearish including someone who I know who thought then that the markets were done for good. Right after that, we experienced a very lucrative rally. I had many stocks up over 100% during that rally that was supposed to be the beginning of the end!

What I am trying to say is don't believe the hype that all is going to break loose to the downside. A 10% correction wouldn't be out of line but a crash isn't going to happen. We had one in 2000, remember?

In saying that, however, there is still no safe place to hide your money. Remember, that short term parabolic move in ERS TIE and other metals and all that gold chatter I was talking about last week where it seemed everyone loved commodities. That group of bulls found no comfort in holding some of those stocks on Friday. Those stocks are done for now. It is time to realize that and move on.

This doesn't mean all are in bad shape. It is just the group I am talking about.

Now with the market acting the way it is, I still find myself holding a lot of stocks that still have beautiful chart patterns. Nothing says they can't get worse but the fundamental backdrop for them supports holding them if they only correct a small amount or on very low volume. This would just be a base setting period for them. They should be some of the first stocks to move again, when the pullback ends.

Stay positive, take some profits, cut your losses, don't buy falling knifes, and avoid new buys unless the fundamentals are beautiful.

Have a great weekend. Aloha!





New Swing Longs: HSR WLT USEG

New Swing Shorts: SIVB ELY NVT

Longs Outperforming Market: TGC-200 SMDI-135 KNOL-146 IIP-93 NTO-98 IFO-54 JOBS-26 GPIC ATHR-82 SHFL IHS-29 LTM LEAP EFII BWP AOB RBY PMTR-35 DIL-34 UVN DRH-25 PKE ISV-49

Shorts Outperforming Market: NONE

Stocks On Radar Screen: AZPN HCR ININ

Take Some More Profits, If You Haven't Yet: RAIL TXCO VTS NVDA IVAC HOM EMKR TGB SIM LNUX

Taking Rest Of Profits: NGPS ESLR TRAD CDE EVST LONG ZEUS STEL FC RCNI

Cutting My Loss: CPST ANO EXFO FCSE

Disaster Cut Losses: GLBC (sold first half on Fri, selling rest at open)

23 comments:

mac said...

Josh,

In your experiences, does the market's weakness trump the strength of a stock, or is it vice versa? I know O'Neill says that 3 out of 4 follow the trend of the market. If you have a strong stock(IFO) do you look to take at least some profits quicker because of the overall market looking crappy here, or is the fact that a stock is very strong in the face of a crappy market tell you that you should do the precise opposite - look to hold it longer. Tough call but wanted your thoughts.

Also, IBD said that the put-call ratio was 1.12 on Friday, which can signal much fear and market bottoms. Then they said, "However, it's unusual for the put-call to jump so soon when the indexes have just started to correct." I couldn't tell if they were implying that this spike is good or bad for the market here with this last statement. The word however confused me. Thanks as always for your great work here. I continue to learn lots.

Market Speculator said...

that is strange but given the market sentiment lately the 1.12 does not surprise me. There is so much negativity from the media...

I am still waiting to see how the markets fair the next few weeks before I make any BIG trading decisions. I'll hold onto my stocks that held up the past few days...otherwise, my cash will build and I'll be waiting.

Anonymous said...

What do you think of IMOS now? Had a real good report, bounced off what looks like it's pullback to solid support, most indicators look good, it's tempting. The only fly in the ointment is how low does this panicking market go and take what looks like a good set-up with it? The NASDAQ does look like it has pulled back to a support area and could bounce too.
Bob C.

Joshua_NControl said...

mac: Not if the stock is in a leading industry group and there are other stocks in that group going up in the bearish market.

You still must take profits on a stock in a bear market faster than in a bull market. You have to treat them like speculative stocks in a bull market, if you are not an experienced trader.

They don't know. Just like I don't know. Just like EVERYONE doesn't know.---question on IBD.

Joshua_NControl said...

I do not like IMOS. It should never have undercut the opening of that breakout day.

Pass!

Anonymous said...

josh, i wanted to reiterate your blog is the best. i am really trying to step back right now and look thru whats strong and whats weak, your blog is always where i go to see if i am way off base. anyways, i was also going to short ELY and I was looking at shorting RWC(weekly chart looks ugly with RWC weeklyMA rolling over and no real support until $3, what am i missing ?) also doesnt SIVB have hard support at $46, even though it broke 200dma seemed like support was close for good risk/reward ?...sorry for all the Questions but i am trying to see what i am missing and always working to improve. (do you have any screens u use to find shorts? i usually just look for stuff breaking 200dma or 30weekMA (30week MA is Stan Weinstein's standard)- best, OR-kiter

Anonymous said...

Hi Josh:
Here's the data you're looking for:

Saturday, May 13, 2006
Two Consecutive Broad Declines: What Comes Next




We had two consecutive days on Thursday and Friday in which 70% or more of traded issues declined on the day. Since 1990 (N = 4124 trading days), that has only occurred 13 times.

The next day, the S&P 500 Index ($SPX) was up by an average .59% (9 up, 4 down)--much stronger than the average daily gain of .04% (2174 up, 1950 down) for the sample overall.

Two days later, the S&P was up by an average 1.37% (10 up, 3 down)--considerably stronger than the average two-day gain of .08% (2209 up, 1915 down) for the 1990-2006 sample.

What that tells us is that two consecutive down days of very negative breadth is a rare occurrence. It is also interesting that 7 of the 13 next day occurrences led to price changes of greater than 1%, suggesting that volatility follows broad two-day declines. Looks like it might be worth looking for buying setups on Monday and watching for a carryover of volatile action.

posted by Brett Steenbarger, Ph.D.

"A. FRIEND" of your BLOG

Anonymous said...

Hi Josh:
One caveat to my post above: note, he started data in 1990!

I remember Oct 1987... Thurs and Fri were like Wed and thurs of 1987. I went into Fri looking to buy an early morning dip on margin liquidation but was was talked out of it by my partner. We just stood aside. That Fri we were down another 187 pts. Over the weekend James Baker was quoted talking down the Dollar. Mon. you know what happened.

So, I read with some trepidation front page of Wall St. Journal yesterday that administration, Bernake etc are pleased with the Dollar's decline and has their tacit approval!!!!

My temptation to buy Mon. mornings follow thru decline , if thats what happens, or buy the opening, is tempered by this Dollar bashing and living thru 1987!!!

"A. FRIEND" of your BLOG

Joshua_NControl said...

I LOVE HISTORY!!!!

THANK YOU so much for your facts!

Great job!!

I really appreciate it!!!!!!!!!!!!

Anonymous said...

I disagree on IMOS, im long some from fri...had a good earnings report and is a low risk play with the 50dma being support if the trade does not work out. Volume has been light on this pullback, and its just prolly the flippers just doing their thing. and if not, its a small loss and move on.

Market Speculator said...

Good luck with that long...just curious why you'd try to catch a falling knife???

I am guessing you'll be waiting awhile before you show any type of return on this. You'd probably be better off sitting in cash, earning 4% then waiting until IMOS sets up properly.

But, time will be the ultimate judge! Good luck

Anonymous said...

Hi Josh:

By the way, if a Tsumami is coming or not, you'll know way ahead of time. In 1987 it traveled West; from Japan to Hong Kong to Europe and then to the U.S.

In those days I got up early to see what Japan and Hong Kong and Europe were doing. If they're all down big time.....but if they're even or up, then chances are what we had or are having was/is a garden variety, plain ole vanilla correction ,no big deal. And, then one could do some scalping.

Be careful out there.

"A. FRIEND" of your BLOG

Anonymous said...

To mac who asks, "does the markets weakness trump the strength of a stock or vice a versa"

"When they raid the whorehouse, they take all the girls"

"A. FRIEND" of your BLOG

Anonymous said...

why do you disagree, IMOS is in 1 of the most cyclical groups out there and that sector will nosedive way before the fundamentals do. If you want to stick w/ fundamentals listen to the sellside and let the market take your money. (IMOS has had 5 out of the last 6 days down on above average volume and a big tail on the May8th on big volume, and the stock has lagged the rally and semi group has been lagging. u have lots of near term resistance. yeah it could bounce a little, but it's low risk/reward with the recent volume selloff

Market Speculator said...

I am not in the business to try to outsmart the market or try to think I am smarter than the market! The best traders of all time never tried to be smarter than the market. Just smarter than everyone else...Reminds me of an ole Kenny Rogers song: The Gambler..."know when to fold 'em."

Anonymous said...

joshua thanks for the blog. i got stopped out of some stocks on friday and will take a serious "wait and see" approach. looks like the east markets are shaking a bit here too, as of sunday night. "A. friend" good advice.
good luck too all. i sit in cash this week. keep up the good messaging!

best
not a newbie not a pro

Anonymous said...

hey mkt, u call IMOS a falling knife rofl...im risking 30c(so around 50dma) to see if it can turn up off those gud earnings the other day. You are extremely lost if u think that is a falling knife. here is an example of a falling knife, ABAX

Market Speculator said...

why are you posting as anonymous...

I meant why risk something when the market has flipped over...hey do what you'd like...in 6 days IMOS has dropped 12.5% from its intraday high...

No need to get all huffy and puffy...I am not trying to outwit anyone here...

I do apologize if I seemed a bit harsh, its been raining here for the past 7 days...my city has received 9 inches of rain and my roof has a big ole leak in it!

Good times...that is why we have insurance and its damn good thing it can be repaired!

Anonymous said...

mkt speculator is right on IMOS. my thought is Semi's look like they could bounce but mkt still hasnt settled. why not wait til IMOS actually tests the 50dma or showing a strong reversal to the upside day to show there's a change in trend, until then its not worth watching the bids fall out as the mkt pulls back....man, i am feeling like a winner on selling my FCL/BTU last week, commodities getting smacked, i'm getting stopped out of stuff this AM like RSAS and it will probably rally back now but oh well, looks like it's going to fill the gap now

Anonymous said...

ok, no more IMOS talk, every trade should be measured as risk/reward, as mkt spec and Josh have said- IMOS chart shows poor risk/reward. if u risk "only 30cents downside on IMOS" you better hope your risk reward is strong in this crappy tape, at least 3:1 so your downside is 30cents then your upside should be 90cents plus, assuming you bought in at fri close of 7.45, that means it should go back to new highs to achieve 3:1risk/reward...with the last week of distribution, i would say a new high looks very tough and poor risk/reward but, hey good luck. - or-kiter

Anonymous said...

Wow. Seems I touched off a lot of thoughts on IMOS. Since I started the fray, I’ll explain my thinking. In a downtrending market, most breakouts fail. I prefer to buy breakouts. But when the market does this, I start to look for for stocks that have recently broken out on good news from a good base and pulled back to support and hold. This means the flippers have exited, those that have held for awhile and taken profit, and nervous nellies. This is where the longer term buyers that missed the initial move can support it and it rebounds. I will not buy till it starts showing strength again. This is not a falling knife. It’s not falling into some abyss (and I’m not suicidal) but was falling back to good support. So far today, it’s failing to hold. I haven’t bought but am watching, as these are the types of stocks that can give us some good entry points if the world doesn’t end.
Bob C.

Market Speculator said...

Bob C.

Win some lose some...no one ever made any money standing on the sidelines...

Anonymous said...

Aloha,

Congratulations on ACR if you still have it.

Big reward for "trend followers".

-Bala