A slow but constant selloff hit stocks on a rebalancing day for the Russell indexes, as stocks closed near their session lows, closing lower for the first Friday in sixteen sessions. The losses came despite the debut of private-equity firm Blackstone Group. At the close the DJIA led the way lower with a 1.4% loss, the SP 500 took a 1.3% haircut, the NYSE and Nasdaq lost 1.1%, and the SP 600 held up the best only losing .9%. The blame on the losses were contributed to the subprime problems announced by BSC.
Holding up, along with the small caps, leading stocks in the form of the IBD 100 also lost only .9%. This continues a trend of this index outperforming to the upside and holding up better on the selloffs over the broad market. If this index was leading to the downside on these selloffs, I would be more worried. Instead it looks like normal choppy summer action.
Volume finished over 30% higher on the NYSE and the Nasdaq, due to the Russell rebalance. The key to today’s trading was knowing the facts of the intraday volume action. Volume was trending lower all day long, signaling that institutions were not dumping stocks, until the last hour of the day. That is when volume exploded. But it wasn’t due to selling by big funds. It was due to mutual funds having to reposition their index funds for the stocks that are entering and exiting the Russell index. Therefore, the higher volume with the losses do not signal a distribution day. Investors Business Daily confirms my thinking on this subject.
Breadth was decisively negative with decliners beating advancers on the NYSE by a 3-to-1 ratio and on the Nasdaq by a 2-to-1 ratio. Another nasty number, along with breadth, is that the new lows are trying to expand again, despite the indexes only being 2% or so off of their highs. New 52-week highs only came in with 171, compared to the new 52-week lows registering 144. That is a lot of new lows for a market near new highs. I am not sure how to interpret this.
For the week, the SP 500 and the DJIA led the way lower losing 2%, the NYSE and SP 600 lost 1.7%, and the Nasdaq was lower by 1.4%. Showing investors how leading stocks are supposed to act, even in a poor market, the IBD 100 managed a .1% gain for the week. This is why leading stocks outperform in the long run. The IBD 100 is now up 19% for the year, while most indexes are up around 10%. This goes to prove, ONCE AGAIN, that the big money is made by buying leading stocks, breaking out of sound bases with top fundamentals, in a bull market.
And that brings me to my own portfolio. Most of my longs are all holding key support and are still showing excellent price and volume action. Some stocks, obviously, have been cut this past week with the week market. But that is a good thing. Rough markets give you the chance to weed out the poor performing stocks and move more money into better performing stocks. This is why downtrends are good in a bull market. Constant uptrends make it hard for me to cut stocks that are holding support but not going very far. If I cut them too early, they end up taking off. Then the new stock I buy gives me a quick cut loss. But with markets that have normal pullbacks, I am allowed to separate the weak from the strong.
The only bad part is when one of those weak end up being a large position. Usually it does not happen, but it has happened a couple times recently which indicates to me I need to be more selective and careful with which stocks I pick to load up on. Besides stocks like MTRX and TTG, everything, pretty much, is acting just like it should be acting. Stocks moving higher, holding key support, and moving higher again. As long as top stocks, my stocks, and leading sector stocks keep acting like this it is silly to be calling market tops here. Especially with the NYSE short-interest ratio hitting ANOTHER all-time high at 7.82. Wow! They keep shorting this market despite the near new highs. Brave, I must say. Stupid, I must say.
I hear some people mention that there are too many bulls in the investors intelligence survey at 53% and too few bulls at 19% so we have to be near a top. What these people must not understand is that this survey is HORRIBLE at calling tops. It is ONLY useful at bottoms where normally bulls and bears cross around the 40-45% area. This happens to be good at correlating bottom with price in the indexes. As for tops? Are you kidding me. I guess anything to help there argument.
It doesn’t matter because I can come right back and say, “have you seen the realmoney.com poll this weekend?” So far, bears have 44% of the vote and bulls have only 31%. Last time I checked that doesn’t mean the crowd is bullish. Also have you seen the UBS sentiment index? It is NO WHERE NEAR euphoria levels. That index has a good track of indicating possible tops when the line hits the euphoria zone. It is not even close. The AAII is even close with 43% bullish and 33% bearish.
I hate to tell you this, bears. This is NOT what you see at tops. You do not see pessimism in the media and polls showing 70% of the public thinking we are in a recession, with NYSE short-interest at all-time highs and euphoria levels so absent from this market. Do you know what else is not out there, besides stocks in the Chemical-Fert group? Stocks in CLEAR end stages of climax runs. I can see some stocks in the middle of runs all over the place and I can clearly see that TNH and CF have gone nuts. But calling a top in these is not smart. These stocks still do not look like they are near a top, much less ready to rollover.
The action of GOOG, AAPL, CROX, RIMM, and other leading stocks are still rocking and are not in major climax runs. So it just seems hard for me to want to call a top when the leaders are still leading and some of them are almost closing near their highs on a day like today. If anything, JDSU in 2000 should be the case study for everyone. After that stock topped, it took SIX MONTHS before the big fall. Trust me, calling tops is a game of ignorance and pure idiocy. The right play is going with the trend. Something a TON of people reading this blog probably are NOT doing. You will see a MAJOR difference if you just learn how to do what the best traders of all-time did.
Are there reasons to pullback? Yes. We are getting overbought on all the oscillators I follow: ARMS index, 10-day moving average of the advance/decline line, and the McClellan. But at the same time I see that only 62% of all stocks in the market are above their 200 day moving average. I am not sure if that is bullish and means there is a lot of stocks waiting to join the run or if this index is confirming the overbought market. But I thought I would still give that fact, considering that in February 86% of all stocks were above the 200 dma. That market was overbought. This market might be overbought short-term but the 62% may signal that there is a lot of energy waiting to join the run.
If that is the case, that would be fine with me, only because I see the VIX ticking up a little. It would be nice to back and fill here, if it causes the VIX to rally over 20. That would help me make a lot more money on my longs that decide to follow-through. A 10% drop would even be better as a chance of VIX hitting 25 would definitely give me more volatility to make more money on stocks that are moving. Remember, a higher VIX gives you more potential for gains in stocks. This persistent low VIX does not allow for many stocks to make 200%-1000% runs in six to twelve months. A low VIX like we have now makes 100% winners spectacular. This is why a choppy market or an uptrend with some more 5% pullbacks would be nice. But with all the bearishness I have mentioned, LOL, along with another number I have left out–put/call is at .94–I doubt I am ever going to get my pullback.
Chances are when this market ends, it is going to unleash a horrible bear market. That would be OK also. That would allow me to short all the old leaders like TNH that have made 1000% plus gains since the rally started. Then after making some nice cash on shorts in the bear market, we will eventually get another bull market WITH A MUCH HIGHER VIX that will then give us a real great bull market to work with. The best time to make money is in markets like March 2003-January 2004. Those bull markets, after severe bear markets are what makes some traders careers.
Before I rap this up, I want to go over one more key component of this rally: the Semiconductor Index (SOX). Everyone always says that they don’t think bull markets are real bull markets unless the Semis are moving. The theory goes is that this is where the “hot” and “speculative” money goes for big returns in a bull market; when the semis are moving, the market is moving. Well now we have the Semis hitting new highs and the only question I have to ask is that: does it mean that the market is bullish now?
This scenario, after giving more thought to it, could run a two-way street. At first all I could think about is how bullish this is and now the perma-bears will have to figure out a crafty excuse to pooh-pooh this move in the Semis. Well they gave me a great argument on Friday. I took notice of the Relative Strength line of the Semiconductor index (SOX) and notice a very negative divergence developing. As price has continued to make a stairstep pattern of higher highs and lower lows, the RS line has actually failed to make new highs during any of the important moves in the SOX this year. Since the high in November, the index hit a series of highs in Jan, Feb, April, May, and Thursday. The problem if you look at your chart is that every RS high is lower.
So we can take this in, in two ways. One is that the market will continue to rally here, and now that the lagging SOX has caught up, the market will make a real more exponential move into new high ground. Or the SOX could be the sector that convinces the bears that this market is going to move higher and we suffer a fakeout-breakout. This would turn enough bears bullish to actually put in a possible top. Somehow, I think scenario one is correct, by simply looking at all my charts and the current situation of the market and leading stocks. But scenario two could happen also. We must NEVER rule ANY scenario out. That is smart trading.
On that note, enjoy your weekend and I will see you in the chat room. ALOHA!
top holdings up this week - purchase date
TRCR 432% - 1/12
MA 239% - 8/2
OMTR 162% - 9/15
IHS 136% - 12/21/05
TTEC 125% - 8/25
FTEK 123% - 10/6
MOS 121% - 10/12
MEH 114% - 8/30
CPA 114% - 9/15
MFW 111% - 1/29
HRZ 107% - 9/27
MCZ 106% - 3/27
DECK 101% - 9/13
CXW 93% - 5/19/06
PRGX 91% - 1/12
HURN 90% - 9/13
CNH 89% - 11/2
EVEP 85% - 11/16
ZNH 84% - 12/26
NTL 83% - 4/13
APLX 82% - 9/28
MVIS 80% - 12/21
VDSI 71% - 1/4
AFSI 69% - 4/12
LFL 66% - 12/13
VSNT 63% - 2/5
LTS 61% - 1/11
TESO 59% - 2/16
BMA 52% - 10/24
ETE 50% - 10/6
Market Commentary At Big Wave Trading Bronze Level One
New Swing Longs: Silver Level Two
New Swing Shorts: Silver Level Two
Stocks On My Watchlist: Gold Level Three
Complete Profits/Losses: Gold Level Three
Partial Profits/Losses: Gold Level Three
MauiTrader Forums: Gold Level Three
MauiTrader Chat Room: Gold Level Three
Longs Up On The Day: Gold Level Three
Shorts Up On The Day: Gold Level Three
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