Sunday, August 26, 2007

Very Boring But Bullish Week Comes To An End With Volume Completely Absent; Negative Divergence In Price And Volume On Indexes Developing

Well if you wanted the opposite of last week, you definitely got it this week. The complete opposite happened as stocks rallied on extremely low volume. Even though the rally was powerful and the Nasdaq almost climbed 3%, the volume was almost 1/2 of what it was last week when the index was making new lows and the Fed was injecting money into the system to prevent a crisis.

Now, even though last week looked well and it appears stocks have bottomed, I still can not enter that camp when two things have not happened. There is no surge in volume showing accumulation by big funds; the low volume last week CLEARLY showed that the smart money was COMPLETELY absent. You simply do not have volume that low and have any real accumulation take place. The other thing that has not happened is that we still have not had a follow-through day off the 8/16 lows. Monday will be day seven of the rally attempt from those lows and all experienced investors know that the greatest follow-through that lead to real rallies happen between the fourth and seventh day. Anything earlier and especially anything later and you really lessen your chances of a successful follow-through.

The other thing that continues to also keep me out of the bottom camp is the fact that I still continue to not have that many new exciting longs breaking out and/or forming fresh bases for a strong rally. The fact is, in real uptrend, I WILL ALWAYS have a handful of stocks that are forming nice to near perfect charts. Right now I have very few stocks appearing in my scans that catch these early and the stocks making it into my long scans do not have sound bases and/or have serious flaws with their fundamentals. There are a few exceptions like FALC and ROS that have very very nice patterns. But the fact is they are not perfect. Also, there is nothing new showing up with outstanding EPS and RS ratings. That is yet another sign that this just continues to be part of the cycle that started in 2003 and not a start of an exciting new uptrend.

And adding yet another topic to argue against the bottom is the fact that the amount of 52-week new lows continues to beat 52-week highs. There was only way day this week (Wednesday) where new highs beat new lows. Even on Friday, there were 63 new lows to 55 new highs. Now, I have to be honest, I know for a fact that “the moment” in late 1999 did come with more new lows than new highs. However, after the late 2002 low going into the real bottom in 2003, there were more new highs than new lows. To go along with that the Nasdaq’s ACC/DIS was an A-; right now it is a very poor D+. So obviously, this current rally has NO resemblance to ANY rally that has produced HUGE gains throughout the history of the stock market.

Saying all of this, there are signs that, if the market maybe has not bottomed for good, it has at least bottomed “for now.” The problem is that the indicators and internals that are showing a possible bottom are only SECONDARY indicators. The first I want to look at is the VIX. The VIX was able to successfully enter the 30 area and come very close to the 40 area. The last time that happened was in 2003. Now, when I first saw this I became bullish because that indicates a lot of volatility and when the VIX is high breakouts can make you a TON of money. However, the difference between a VIX at 40 here and at 40 in 2003 is HUGE. The VIX entered 40 AFTER being around 50 in 2002, setting up a TON of big big big winners. This time VIX is coming from the low teens. And the fact that the VIX has ALREADY come back down to the 20 area shows that the crowd is ALREADY, ONCE AGAIN, becoming complacent with the rally after ONLY one week.

Second is the put/call ratio. This ratio continues to remain very high, despite the rally last week, indicating that the crowd, even thought the VIX says they are getting complacent, is getting complacent with puts. The put/call is at .99 which is obviously very near the 1.0 level where “fear” is in the market. The steady pervasiveness with the put/call ratio at this level shows that traders are still making bearish bets betting on a lower market. History shows that these people are RARELY right. So further upside is supported by this high number. Until it comes back down to the .7 area, I am sure we can still move higher. Will the move higher continue to place fear in the hearts and minds of traders, if the rally continues? I doubt it. And if it does I still doubt this is a bottom UNTIL I GET MY GREEN ACCUMULATION-FILLED CHARTS BREAKING OUT OF SOUND PATTERNS WITH GREAT FUNDAMENTALS.

The third and final secondary indicator that suggest we COULD have bottomed is the Investors Intelligence survey. The new numbers, this week, came with 40% bulls and 37% bears. While this number is not a cross, it is darn close. When the bears outnumber the bulls in this survey (which rarely happens) you almost always have a bottom. However, as you can see we did NOT cross yet. So there could be further bearishness needed before these numbers cross. Therefore, it is hard to call a bottom here. Especially, with the indexes not having any 2% or higher up days on heavier volume. Until we get a follow-through day, this Investors Intelligence number is nothing but a number. An important one to watch, mind you. But not the end all to end all.

Now, with all the information I have just given you, the most important out of all of this is this. YOU DO NOT HAVE TO BE TRADING ALL THE TIME TO MAKE MONEY. DUH!!!!!!!!!! UNFORTUNATELY, A TON OF YOU AMATEURS JUST DO NOT GET IT (this is not meant to be mean but if it insults you obviously you have some things to think about). The greatest traders of ALL-TIME knew that to make the BIG money you must sit on your hands A LOT!!! As Jesse Livermore said, it wasn’t his active trading that made him his money but his sitting. Sitting and holding winners on the way up and shorting the old winners on the way down and staying on the sidelines when the market was giving no clear direction. Right now, the market is giving no clear direction.

How do I know this? Easily! How are those investing in longs doing? How are those investing in shorts doing, unless you shorted the stocks in the AHM group? Probably not too well by looking at the returns of the top mutual funds and traders that I know. The fact remains that a TON of stocks have been decimated but the leaders in the big-cap tech group continue to act well. While we have BIDU AAPL GOOG RIMM FWLT WYNN BCSI and the other leading stocks still making new highs or holding above their 50 and 200 day moving averages, there is no way in hell we have a real market top. This is why, despite there being NO reason to be bullish here, that I am not bearish. I simply can not be bearish on the market while the leaders continue to make new highs or are holding key support. Once these leaders breakdown and fail there rallies, not only will I be short on full margin but I will be very bearish on this market. For now, I am agnostic. And I believe that is how the greatest traders of all-time would be here too. In fact, according to IBD that is where they are at so I am sure I am on the right side.

Now, unlike the other psychic market commentators, I can not predict the future. However, I do know one saying very well: “never short a dull market.” So if volume continues to be this low, I would continue to maintain a bullish short-term view and enjoy the trading opportunities that show. Just don’t overstay your welcome and I definitely advise taking some profits on any stock that makes a 25% move in this market. Even if it makes the move in a few weeks, I would still sell some off (20-25% or so).

About the only thing that I can think of that I would do during this low volume market-if it stays a low volume market ONLY-is to read the book by Mark Douglas called “Trading In The Zone.” I know I have recommended it before but I am still not sure if those who did not read it get it. YOU MUST READ THIS BOOK, IF YOU ARE STILL TRYING TO FIGURE WHY THE MARKET IS DOING THIS OR WHY THE MARKET IS DOING THAT. IT DOESN’T MATTER AND IN FACT YOU WILL MAKE MORE MONEY BY NOT TRYING TO FIGURE OUT WHAT THE MARKET IS GOING TO NEXT. INSTEAD, PREPARE FOR EITHER OUTCOME AND STUDY HISTORY TO PUT THE ODDS IN YOUR FAVOR. JUST LIKE THE CASINO AND PROFESSIONAL GAMBLER DOES. You can make a lot of money in a random market environment with improbable outcomes. You just need to learn how to reprogram yourself to master the ART of active investing.

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