Saturday, September 22, 2007

The Best Week of 2007 For My Portfolio Positions Me Well For Some Big Gains If This Market Continues To Rally

There is no doubt that this has been one of the best weeks of 2007. But what has made this week so much better compared to other good weeks this year is that the stock market is finally acting, in what I would call, a correction fashion according to TA 101. Stocks that are bouncing off the 50 day moving average or breaking out of sound basing patterns are working and continue to rack up gains, instead of just acting hit or miss with the few winners giving us only slightly impressive gains. The stocks that are moving now are moving with very strong momentum and that momentum is helping me make gains that I have been accustomed to. There is no denying that the market from May 2006-July was an odd one with many hits and misses for my style. But now things are back to acting normally. This just goes to prove that you should never give up on a proven sound strategy. I am sure many people got frustrated by this market, despite some stocks making big gains.

Typically, in bull markets, I can find many top performing stocks that race up 100-500% before they finally put in a top. However, recently, with the low VIX, it has become very difficult to find strong stocks that not only perform well but do so without cutting key support levels. It really has been a good market. However, the gains simply were not there like they used to be. That, thankfully, appears to be changing as once again I am finding many new longs and am ALREADY nearly fully invested again. Some would say that could be contrarian. But the problem with that is that I am long a ton of new longs that appear to have a lot of room to run. To go along with that the current longs that I was long before the rally got back underway on August 16 have setup all new big bases for more continued big gains to come. Just go to the end of my weekly post to see how many BIG WINNERS I continue to hold from the previous bullish uptrend. Though the holdings are much smaller than they were, the fact is is that I am still long some nice winners while many are completely back on the sidelines wondering how they have missed another rally.

And that leads me to my next point. There is no way that anyone should still be on the sidelines right here. It is quite clear after the August 29 follow-through that a lot of stocks were setting up in nice bases. Since that follow-through day a ton of stocks have completed and broken out of their bases and/or are still creating some great looking charts. You do not see this many leading stocks in so many different leading sectors along with all these new longs breaking out of solid patterns in a weak market. History shows that if you pass on all these nice chart patterns now after a follow-through and instead wait for confirmation that the follow-through was real, you will miss out on all the big gains. Not all follow-through days lead to a bull market but no bull market has started without one and this market is acting like it is going to work. The best stocks breakout within the first three months of a new rally and many of the biggest winners show up within the first month. So the longer you wait the less chance you have of HUGE success. The best long I have had in the past five years was TASR. And even though it took four months before breaking out of its perfect flat base on 7/22, the stock still rallied over 200% from the 3/17 follow-through day for the Nasdaq. So the best stocks move early and they move a lot.

Granted, anything can happen, and you better believe that that is very true. But at the same time, history has shown over and over than when you have this many well-formed green charts in so many different areas of the stock market right after a follow-through day that usually more upside gains are going to come.

Now, like I said, nothing is written in stone but before we put in a bottom on August 16 the fear levels were rising to a borderline psychotic frenzy on the subprime mortgage issues. The fear that it was spreading everywhere helped set the bottom with the put/call ratio zooming above 1.3. Even though complacency from the recent rally is starting to slowly creep in again. The fact remains that a lot of people have already entered the “camp of calling a correction.” They believe the market has already come too far too fast off the lows. That very well may be true but in the last three days we have had three accumulation days and one low volume short pullback. This is very bullish on the short-term and is not the action of a stock ready to put in a short term top already.

One of the most impressive things I like about this rally right now is that the leadership is strong in many sectors and volume has been very powerful the last three days higher. Even on Friday, volume was higher by 62% on the NYSE and 31% on the Nasdaq. With volume now coming in over the 50 day volume average, it is clear that institutional investors have come back into the market as buyers–not sellers. Some will say that the quadruple witching had the most effect on the volume. However, it is hard to explain that about the other two high volume sessions. That volume was in no way related to the quadruple witching. Instead it was the bullish response by investors to the Fed chairmans decision to slash the fed funds rate by 50 basis points. That event is what ultimately has led stocks to one of their best weeks this year with the NYSE clearly leading with a 3.2% gain.

But if your only focus was with the overall indexes, then you missed out on a lot of money as many leading stocks made extremely impressive moves. The IBD 100’s 6.2% gain for the week confirms the enormous strength we saw in leading stocks this week. For the year the IBD 100 is up 32.5% compared to 7.6% for the SP 500. This goes to show everyone, once again, that if you want to make the big money in the stock market, you want to focus on the top stocks with top fundamentals breaking out of solid and sound chart patterns. This is the only way to consistently beat the market every year and make a comfortable living in the process WITHOUT stressing yourself out to all the intraday price action. Sure it is great to get 50 to 1 margin on a futures account. However, you still have to spend your WHOLE DAY watching ticks and bar charts. Seriously, during the day, I have much better things to do. Like surfing or going to the gym.

There are some internals that I would like to go over, before I head out of here for the weekend. Some market pundits are worried that the cumulative a/d line is not keeping up with the prices of the SP 500. I then also heard that besides the a/d cumulative line not keeping up that the cumulative volume is nowhere near all-time highs also. Yes that is bad but last time I checked the fact that the cumulative a/d line and the cumulative volume was not hitting new highs with price did not prevent the indexes from continuing to rally. As rallies get long in the tooth–we have been in a NONSTOP bull market since October 2002, mind you–the overall participation of stocks declines as bigger large cap stocks make up the biggest portion of the market are the favorites. Most people end up investing in the big “known names” of the most recent bull. GOOG, GRMN, AAPL, BIDU, RIMM, etc…comes to mind.

Some people are also complaining about the Transportation index lagging and not being anywhere near all time highs. Well, while everyone worries about that and focuses on the index, I will be in my little corner going long and staying long the leaders in the group like DRYS, GNK, GLNG, DSX, and EXM. Something tells me that I will do much better by focusing on these leading stocks instead of worrying about the Transportation average.

The other focus is on some oscillators that are also showing the market overbought. Well, to me that is fine and bullish as if the stocks pullback we are going to get oversold very quickly and will probably form higher lows on the McClellan and 10-week MA of the a/d line. So it is probably best that we do not race to new all-time highs in the indexes right now as it would probably create a lot of negative divergences everywhere in the technicals. But a nice slow uptrend will surely place positive divergences in many if not all of these overbought/oversold indicators.

Overall, however, it pays to really on pay attention to price and volume on the index and leading stocks. If you are long the stocks that I have been going long the past three weeks, you are definitely sitting on some nice gains and should be doing very well and/or be nearing new account highs or building back a lot of those losses you might have suffered after the July to August slide. I took a big hit during that time due to me holding on to some longs. But now all those losses have turned to gains and my account is near another all-time highs DESPITE me not being fully invested. If I was on full margin right now, I would be at all-time highs already. However, if this market has more legs to it, which I believe it does, I need to have a lot of cash available in case I get another chart that sets up like F***, R**, D***, B**, Y**, V**, J***, or C***. Like I said, I still have only found a few near-perfect charts and only one of them can be considered close to perfect. If this market is going to move higher, there should be one or two more perfect patterns waiting in the wings to be found out there. If not, I will continue to pick up all the stocks that look like the ones I have listed. I would name them here but until it is up 25% for paid subscribers, I feel like it would be very wrong for me to tell you guys the stocks we like that are making us very wealthy.

It still isn’t the time to get filthy rich. Those ONLY happen after severe long bear markets. The last time we had to get rich was March 2003 (October 2002 was when stock like SOHU, SINA, and NTES first appeared so you could use that date) to January 2004. Since then, we have not had a big enough downtrend–20% or more selloff–to give us one of those perfect moments.

For now, enjoy what this market is giving us. The odds of higher prices well outweigh the possibility of lower prices and that is the way we should be playing this market. But, don’t think I am a foolish over-the-top bull here. I could turn on a dime and go 100% cash and start pushing my short bets if I had to. If we start getting a ton of distribution days on large price declines in the indexes, trust me I would have no problem selling off my once nice charts to save my ass from big losses. A beautiful chart is no longer a beautiful chart to me once selling hits so I have NO problems selling off a stock that at one time was either a big winner for me and/or was a beauty but now a beast. Aloha and I will see you in the chat room!

winners: FSLR 73% IHS 185% DECK 129% MOS 179% BCSI 93% HURN 83% TTG 66% IMA 58% VDSI 166% CNH 108% ASTI 73% INNO 56% ALVR 52% ZNH 389% EBIX 53% ICOC 96% NVT 62% MA 199% SFLY 64% OMTR 279% CRNT 97% LFL 70%

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