Sunday, August 12, 2007

Why Are People Trading/Investing In This Market Environment?; Stocks Suffer Worse Week Of Volatility On The Heaviest Volume I Have Ever Seen

As this week went on and on, I started to wonder why I even returned from my vacation. I could have easily have dealt with all this volatility, small longs and shorts, and loss cuts while away from my main screens. However, I am very glad to be back and to finally be posting long post. Now with me back at home I can clearly get all my analysis done. And what I have found after going over everything this week is that most professionals that thousands of investors listen to have overanalyzed this market to death and would be much better off if they advised what they should be advising. Going to cash and letting the market play out.

These guys do not get paid to do that and that is why they are always recommending some stock here or there. However, as a professional that completely understands that there are only a few times every ten years to make HUGE money, I also know when it is best to keep your cash heavy. Times like now is definitely one of them. I hear a lot of investors and commentators advising traders to pick up their favorites at these discounted levels. What bothers me more than anything about this crap advise is that these stocks can stick around these discounted levels for a long time. Go back and see how some of the favorites of 1998-2000 are doing today. They have not come back and some never will. This is what is going to happen to many of the stocks that have come well off their highs during this pullback. Some stocks are broken bad enough that there is no hope for them any time soon.

However, there are a lot of stocks holding up during this downtrend which hints to me that things may not get too much worse from here. Too bad that is the last words of so many traders that do not cut losses, in case they are wrong. I have to admit that I will never be one of those traders. I literally feel that I am in the zone and even watching my gains of 64% fall to 47% the past two weeks did nothing to shake my confidence. Had I not cut losses and instead would have “hoped” (dangerous in the stock market) that some would have returned I believe I would be under 35% by now.

Some traders, including some subscribers, are just so upset that they have lost money and that great patterns like JDAS AFSI and ESEA failed so miserably. I hate to tell everyone this, but 3 out of 4 stocks follow the general trend of the market and no matter how nice they are the chances of them following the market are 75% in favor of them to do so. If patterns like JDAS AFSI ESEA and HUB.A would have showed up right after the March 2003 follow-through you can guarantee they would have done as well as those stocks did too. And how about two very pretty charts that are both now ugly as can be: VSR and SMTX. If those stocks would have shown up with those patterns at the start of a bull market we would have made at least 3x as much as we did. You have to understand that you can NOT just make a lot of money any time and any where. Some people can that use options. But trust me this is not easy. In case you do not remember and/or do not care to do some real work, I will tell you that over 18% of the stock market made 100% or more moves from March 2003 to January 2004. Since the July/August lows we have only 4% of all stocks up 100% or more.

If you scan through my free blog and look at all of my top stocks, you can safely say that at the start of a bull market these gains would have been much higher. So why am I talking about all of this performance in a bull market to performance in a bear market? Because, so many people are not doing well right now and some traders are losing a LOT more than they should be. They are overtrading. I know some people that are buying dips in this market like they were two months ago. The market has changed and most of these traders are going to wash out. My job, imo, is to make sure you do not get discouraged and wash out. The smartest and most prudent thing you must do right now is preserve cash. You must sell your laggards, raise cash, keep new buys or shorts small until there is a clear trend, but continue to hold your longs that show absolutely no signs of problems like HUB.A.

If you do not get discouraged and do cut your losses you are going to have more money to invest when the market does give you that “perfect moment.” Remember, you only get those 3 to 4 times every 10 years. Trust me, you can make good consistent money during the rest of the time (USUALLY NOT TIMES LIKE THE PAST TWO WEEKS). However, you can ONLY get rich with a very high reward to low risk ratio after the end of a bear market, following a follow-through day. This market has only been pulling back for three weeks and we have not even lost 10% so I find it really hard to believe that if we put in a bottom here that it will lead to a “moment.” However, if we can get more pain in this market by moving lower from here, one thing will be clearly certain: the volatility will be high enough to make those that find the next TASR very rich.

The VIX has risen to 28.30 after hitting 29.84 intraday. There is a direct correlation between market bottoms and a high VIX reading leading to some huge gains. And you can be sure of many things, when this moment happens, people will be too worried about A) a recession B) AHM and BSC or C) that you will lose more money because the market has been so bad. I seriously do not think we are at this point. There are still too many people who believe that the market is going to rise that the fear is not thick enough for a real strong bottom to occur. A tradeable bottom? Sure, that definitely can setup here. However, I sure am void of very pretty and very green charts. I just simply do not have may HUB.A type stocks out there. If we get a follow-through day and hold the recent lows, as the weeks go on, we should have more charts setting up with heavy accumulation, max green BOP, and sound chart patterns. If we don’t get these setups, you can be sure that the market probably has much longer to work on its downtrend.

I am seriously hoping that this is a start of a downtrend. I would love to see the market bottom with the VIX around 40. The stocks that setup in proper-green-accumulation-filled charts will be making us a lot of money. And we are going to need that money to get these stocks, so it is best to keep cash heavy when there is no edge. And this weeks volatility clearly shows that there is no edge for the bulls or the bears.

All of my recent short recommendations have been doing very well for the bears. But right when I decide that the uptrend is pretty much in trouble and start my small testing of the shorts the market starts getting whippy. This signals to me that it is not the best time to short then, despite the extreme weakness in the finance and bank stocks (which I got by the way, if you study my “new shorts” section on the gold site at When I start to see my favorite high priced leading stocks like RIMM AAPL CROX GOOG FWLT BIDU TNH (starting to crack; now needs to fail its upcoming rallY) and MA start to top, you can guarantee the market will be extremely weak and I will have my opportunity to short. I plan on not only shorting those eventual former-leaders when they top but I will be buying some long-term in-the-money puts. But almost NONE of these stocks, except TNH, have the appearance of them definitely topping. So right now it is PERFECTLY CLEAR to me that neither bulls (longs) or bears (shorts) have a clear smooth edge. The downtrend and uptrend will be both sloppy and choppy for a while. The extreme uptick in VIX is your proof that things have changed. The slow but steady uptrend has given way to a choppy and irrational market. These are the kind of markets professionals know to keep trades either small or none at all.

Now to go back and focus solely on the market, on Friday, there is no doubt that the fact that the Fed is injecting $38 billion after injecting $24 billion is not a bullish scenario. It makes me wonder if we are just waiting for the inevitable. But if that is the case, EVERYONE who actually listens to me should be making money by not losing money. Even if this market bottoms here, you will have PLENTY of time to get long the best stocks. The best stocks do not all show up the day of the follow-through. Some may show up that day but the next three weeks is key. That is when the best of the best should show up and breakout. However, I am not sure how you get that happening when the Fed is so nervous about the possible fallout that it injects money into the system. Something seems a bit fishy.

Another thing that happened on Friday was that the rally attempt in the DJIA failed veyr quickly and when the market flashes a distribution day within three days of a follow-through, its rally almost always fails. That happened on Thursday. When that happened IBD's Big Picture noted that when the market does in fact flash a distro day that fast, 13 out of 14 times since 1982 the rally has failed. Well you can make that 14 out of 15. And with the lack of pretty green charts I doubt that if we get another follow-through this week that that one would even work.

In this environment you must remember to keep all new longs and shorts small until a trend becomes clear. It is still not clear if this is the start of a correction or a dip before another leg of this bull starts. Even if it is another dip, there should be some good money to be made with the VIX around 30. But remember if the market can move lower, we could get the VIX to 40 and that is right around where it likes to be for a market to make a low.

Bottom line: it is up to my charts right now. All my pretty green charts are gone except for a gem like HUB.A and OMTR. I will get plenty of beautiful charts before a real rally starts. Before the March 2003 bottom, GRMN, SOHU, SINA, and SNDA all were making max green-heavy accumulation filled charts breaking out to new highs well before the March 2003 bottom occurred. And then remember, TASR then showed up four months AFTER the market bottomed. Just like market tops, the best stocks show up four to seven months AFTER a top or bottom. This works much better with tops as leading stocks breakout faster in bull markets. But many great stocks do show up three to four months after a bottom.

Remember to stay positive and even if this pullback last months and months (THIS WOULD BE A VERY VERY BULLISH DEVELOPMENT), there is always some areas to make moneys in a rough market. If you are a silver or gold member, watch and learn.

Aloha from Maui!! It is good to be home but YES I do miss Texas.

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