Saturday, February 17, 2007

Stock Indexes Erase Early Morning Losses, Rallying Into The Close, Closing Near Their Highs Of The Day

Market Commentary At Big Wave Trading. Bronze Level One

Sample of Commentary from Thursday 2/15/07:

Stocks Indexes Keep Rallying; New Buy Candidates Drying Up As Most Are Extended Beyond Proper Buy Points By MauiTrader

There was plenty of economic data for the market to feast upon, on Thursday. However, neither that or continued testimony by Ben was able to really move stocks one way or the other. Though industrial output fell by the largest amount in 17 months, stocks didn’t mind and were able to close higher across the board, for the third straight day.

At the close, the Nasdaq led the way with a .35% gain, the SP 400 gained .3%, the SP 600 and DJIA followed with .2% gains, and the SP 500 gained .1%. Leading stocks in the form of the IBD 100 index gained .6%, well outpacing the broader index. However, the lagging index, has overall been a disappointment since the rally started in July/Aug.

Volume was lower on the NYSE and the Nasdaq. The lower volume indicates that the big boys weren’t necessarily falling over each other to chase stocks up here, after such a strong day yesterday. Breadth was positive on both exchanges. Advancers beat decliners by a 10-to-7 margin on the NYSE and by an 8-to-7 margin on the Nasdaq.

There seems to be a problem with traders recently. I am starting to hear TONS of complaints about underperformance. Hello, folks. This is what happens when big-caps lead. The small cap, momentum, and tech stocks simply can and will not keep up. This bull market is more than four years old. The small-cap leadership has changed to big-caps. Therefore, obviously right now growth investors are going to underperform the market, unless they are very lucky and are hitting all the home-runs that I am finding very scarce to find out there.

However, I know what the real problem is. Those traders that now complain that they are underperforming were the same traders that were bitching in August that this rally wasn’t real and was only a short-term bounce. Even though stocks were breaking out of sound bases and I WAS GOING LONG STOCKS, people were bad mouthing the market saying that it couldn’t possibly rally on low volume. Well it has and it hasn’t stopped. This market has not experienced a 2% pullback in how long? It is too long. This makes a TON of stocks too extended to buy. And that is good news for people like me who were long when they were supposed to be long. But it is horrible for those watching the market run without them.

Now those same people are demanding to make money with new buys. Well too bad. There are not a lot of SAFE high reward/low risk buys out there. Everything is too damn extended. In the IBD 6000 index, 931 stocks have A accumulation/distro ratings, 2561 have a B, and 1216 have a C. Only 1200 stocks have D or E ratings. This shows that this market is under good accumulation and that constant accumulation makes it hard for people to find stocks not extended. It is best to stay on the sidelines, if you find yourself in this position.

And also, stop the bitching. You missed the right time to load up on CANSLIM stocks and/or HOT momentum stocks. This current market is only offering crap to trade. I have been keeping all buys small since January 1st and will keep that pattern the same until I get a real pullback. Until the market pullsback 5-10%, there is no way in Hell I am going to load up on any breakout from any stock in any sector unless the market is FLYING ON HUGE VOLUME.

Even though there aren’t a lot of stock setting up and breaking out of nice bases, just look at sectors like the Mach-Construction, Commercial Serv-Schools, Steel-Producers, Food-Dairy, and Computer-Data Storage sectors. They are moving up faster than the overall market. Look at all the Medical stocks hitting new 52-week highs; those stocks lead in bear markets and they may be showing up a the top of the new high tables in preparation of a weak market. But the fact is these stocks are making significant gains. All of this means that there is always a bull market somewhere. Just because you are not making money now does not mean everyone else is not also. You are just in the wrong stocks and/or are overtrading in a market environment where cash is probably better off.

Look at the Perritt mutual fund. He holds 177 stocks (similar to me) and yet he has 23% cash. This shows that some other smart investors that love to buy strength can not find a ton of new buys either. Trust me, if you are not making a killing, don’t worry, others are not either. The only difference is they know that this is not the time to make a killing. The market will let us know when it is time to make a killing. Now is not the time, four years into a bull market and seven months without a 2% decline. We need to have a selloff before any significant money can be put to work in the next batch of winners breaking out of beautiful bases. How do stocks break out of bases when the market never pullsback to give these stocks bases to breakout of?

So here we are with a market that has only had two distro days on the SP500 and one distro day on the Nasdaq for the past four weeks. A market where the DJIA is hitting all-time highs and the Nasdaq fights resistance at 2500. The only logical conclusion here is to expect more gains. There is no reason for the market to stop rallying as the wall-of-worry is still very tall and the market loves to climb these walls. The put/call ratio has come down to the .75 area, suggesting the wall is starting to lower. However, with all the bitching I see out there, I am not so sure the market doesn’t have more pain to inflict the under-invested bulls and the perma-top-calling bears.

Unless you are a crazy daytrader, there is not much you should do here but relax and let the market run and accumulate and keep your cash heavy so that when a pullback does happen you will be ready for it with a lot of money. Patience and more patience is very important to have here. This market will either offer us something to trade with the stocks making bases now that are not on the radar screen yet or we will just have to keep watching this rally and enjoy the gains we will make with the longs that are working. Make sure to get rid of the laggards. Don’t keep trash that is not moving up when the market is moving up.

Great luck out there, don’t let this market get to you, and I will see you in the chat room tomorrow. Aloha!!

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Top Holdings - Signal Date

PTT 344% - 11/16
KNOL 265% - 1/12/06
AKAM 251% - 9/30/05
CVO 166% - 8/17/05
SVNT 136% - 8/24
TTEC 124% - 8/25
MA 116% - 8/2
CCOI 111% - 9/27
AOB 111% - 9/12
ICE 110% - 9/21
CPA 108% - 9/15
CLEC 105% - 9/25
CHINA 103% - 8/16
HMSY 93% - 6/23
IGLD 93% - 10/26
OMTR 89% - 9/15
HRZ 88% - 9/27
TRCR 84% - 1/12
LTS 80% - 1/11
IMKTA 78% - 8/28
JST 76% - 10/13
ACY 57% - 2/5
TNH 73% - 10/26
LFL 49% - 12/13
TATTF 53% - 12/13
FTEK 66% - 10/6
BMA 67% - 10/24
CXW 57% - 5/19
IIVI 57% - 8/30
IMMU 46% - 12/19
XOMA 45% - 1/12
MOS 45% - 10/12
BAM 74% - 11/17/05
GVP 60% - 11/20
HRT 69% - 10/23
PCCC 56% - 10/26
ULTR 55% - 10/27
NEXC 69% - 10/25
DA 59% - 1/25/06
ECGI 47% - 10/20
AOI 58% - 11/19
BMRN 50% - 6/1
NWK 66% - 12/13
BMTI 64% - 10/25
WGA 54% - 8/30

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