Monday, October 22, 2007

Anniversary Of The 1987 Crash Sets The Stage For A Mini Stock Market Crash As Stocks Selloff On Higher Volume

Boy oh boy was it ever ugly on Friday, with the whole market selling off leaving no room to hide. When it was all over, every index lost 2% with the Russell 200 leading the way lower with a 3.2% whack. The IBD 100 loaded of leading stocks also fell 3.4%, showing that there was no where to hide. My portfolio took a 5.3% hit but overall when I look at everything I have to admit that most longs continue to look good, 75% pulled back on lower volume, and the stocks I did sell were either cheap POS stocks or were recent longs that were not large buys which saved me from major carnage. So before I go any further into my analysis I have to apologize for not getting irrational and losing my mind by panicking over a one day selloff. I simply can’t lose my cool, when everyone else is.

What made the selling worse and that has to raise our yellow flags is that volume expanded by quite a large margin on the NYSE. But volume was only slightly higher than the volume on Wednesday on the Nasdaq. So the volume was not unbelievable. Also the NYSE volume was still well below all the volume in August. So when we honestly look at the volume situation we have to admit that it was bad in the fact that volume was over the 50 day volume average on the NYSE and the Nasdaq. But with volume on the NYSE lower than the highest levels on the September rally and well below the heavy volume in August, can we really say it was that bad? And just by looking at the Nasdaq, it becomes clear that the volume was not that bad at all. Now, on top of that, remember that is was also monthly options expiration and that added to the volume. If you take out the option volume, the volume would have been either slightly below or above the 50 day volume average. It simply wouldn’t have been real distribution.

About the only commentator I see holding there own right now on CNBC that is not completely bearish is Jim Cramer. I decided to spend a lot of time watching CNBC and I swear to God the mention of 1987 occurred every 30 seconds. The other thing that quickly became apparent on all the programs was that everyone expected stocks to continue to selloff. When I combine that with the sentiment in my chat room and the other rooms I follow, it feel like we are more close to bottom than a top.

I can’t help but think back to those days in NYC in 1999-March 2000 when everything was rosy and everything seemed so perfect (which was obviously not the case-Al Quaida). Nothing was bad and stocks raced higher every day with not a bear in site except the usual perma-bears who missed the whole uptrend. Besides these few everyone wanted to be long stocks and buy them up with no regard to price. Nowadays, it seems everyone is afraid of stocks and I have a ton of subscribers that want to be short here and/or want to sell their longs. It is like they have decided to stop listening to their charts and have instead entered back into a world of amateur “gut feelings.”

Could we selloff more next week? You better believe we can. No doubt about that. But how much more selling can there be in this short amount of time when everyone is saying the market is going lower and that we should sell stocks. Did anyone see the put/call ratio on Friday? It jumped to over the fear level of 1 and closed at 1.08. I prefer to see a 1.25 to 1.5 reading to show extreme panic but the fact that the ratio is back above the 1 level shows that fear is back in the market. The VIX has also rallied from 16 to 22 in a very short period of time indicating that fear has risen very quickly. It is not like 22 is a high number and bullish for the market-it isn’t. But the fact that the VIX moved so much in a short amount of time and the put/call is up here makes it hard to get extremely bearish here.

What I would see to get more bearish would be to see more complacency, not fear. To get me really worried, the put/call would have had to have dropped to the .7 level and the VIX wouldn’t have moved. If that would have happened and the market fell 2-3%, then I would be very worried for stocks. But for now the fear has risen very quickly and just a little bit more selling could put a floor in.

For those that think I am being biased on the bullish side, all I have to say is “you have to be kidding me?” Those that have been reading me for a long time, know that I turn bearish when the trend turns bearish but I will not be a hardcore bear until the real leaders top. Then and only then will I be a “hardcore” bear that looks to short the rallies and cover off the low extremes. This bull market has existed since October 2002 making this a five year bull market. According to history, we don’t have much further to go. But everyone that understands and knows the market knows that the biggest and most powerful gains come at the very end when stocks “blowoff” in one final glory rally before it all ends. Most people are long gone as the pullbacks in February, July, and now October shake them out. Just like at the end of 1999 when the October selloff scared most longs out and had EVERYONE convinced that was the top, they were wrong then and more than likely they are wrong now.

After missing that top call, stocks took off on an amazing rally that sent stocks on their most powerful and quickest advance that rewarded those that listened to their stock charts and not the BIASED opinions of journalist. When stocks took off like that and everyone that top called in October missed out, they came in around February and bought stocks near the top. When the market pulled back THEY REFUSED to cut their loss so they wouldn’t miss out on another rally by being scared out like they were in October. Instead the pullback never bounced and neither did their stocks. I believe this must happen in this market, before we top. Right now, we are not there.

When BIDU, GOOG, and RIMM must be owned. When you are a fool to not be long anything China, solar, or a dry-bulk shipper then it will be a top. Are we there yet? I seriously don’t think so. I just don’t believe you can top when I have this many longs that are holding key support and have beautiful setups and with the public so pessimistic after one hard day of selling.

Something else everyone needs to remember is that the biggest down days for the stock market happen during bull markets. The vise versa is true in bear markets. The stock market has some of its biggest and baddest rallies in bear markets. If people do not understand this, they need to study the year 2001 and see how strong some of the one day gains were in that very bearish year. In 2003, I remember one day in June of 2003 when the markets fell 2% and everyone was sure we topped. I took a look at all my longs and noticed that so many were green and had low volume pullbacks that it was just hard to believe it. The volume was low that day but before that there was a HUGE intraday bearish reversal on HUGE volume a couple of weeks before. That made the 2% selloff look like the final nail on the head.

The other market where everyone was sure we had topped was in October of 2005. That is when I was offered a job in Chicago to run a large amount of money (I turned the job done; Maui no ka oi!!) and the fund manager was giving it up because the market DEFINITELY had topped. It was time to give up, according to him. However, my charts completely disagreed with him as many stocks were setting up in strong bases and there were a lot of charts with a lot of green BOP showing up. This does not happen in a market about ready to “give up.” Now, just like then, seems just like this. My best longs with the best chart patterns look completely fine. Even one of my longs that was a very large position (I have taken 60% of profits already) does not look like it is putting in a “for sure” top. This stock is setting up to be like TNH. TNH appeared to have definitely topped on climax runs in February and May. Yet, there it is, still chugging along but starting to look weaker and weaker. By the way, TNH is one of those stocks I am looking to short in-bulk. It is a former high-flying leader.

All of this is necessary to go over with all of you to remind you to not panic out of good charts. Trust me, if there is nothing wrong with your stock, please, you must follow the rules. You don’t want to lose a position in a stock that has the potential to be another OMTR or any of the other stocks that are listed below. Trust me, missing out on those gains, just because the stock market fell one day, is not the smart thing to do. You don’t want to be the guys in 1999, January 2004, October 2005, August 2006, or August 2007. It isn’t worth missing these kind of gains, just because you are scared of the market.

History, has proven OVER AND OVER that the best time to short stocks is five to seven months AFTER the stock has topped on its chart. The other thing that will happen is that the earnings and sales will look better than they ever have before. At the top everything looks perfect. Right now, everything doesn’t look perfect. Despite the investors intelligence survey, I truly believe by the NYSE short-interest ratio being near an all-time high and the put/call over 1 that the crowd is betting on a fall. The crowd is usually wrong and my charts are usually right. So with the odds in the favor of higher prices, I must remain long.

But, darn it, if you are sitting on any of the gains that I have listed below and have not made any sells, shame on you. That is greedy trading. Like my DRYS example, I have sold off 60%. The rest can ride. But the easy quick money has come and gone. 90% gains in two months is pretty damn good. Same with speculation stocks like ASTI and APPY. If you haven’t taken any profits, you better believe you need to take some. Just in case this is a top, you don’t want to have all your gains slip away.

However, I continue to think the crowd is too bearish and I refuse to join the camp that every other professional non-professional is in. I make my living off my charts. They don’t say it is time to be fearing lower prices. They say it is time to prepare for a possibility of lower prices. But the charts STILL tell me to fear missing more upside. These charts are still setup for more gains. Until they rollover and say “look out below,” there is no way I am jumping the gun and dumping some of these beauties. The stocks that fail quickly, dump them. GET RID OF THEM. The stocks that hold up well and pulled back on low volume with BOP still very max green. YOU HOLD THEM.

Aloha, and I will see you in the chat room, where facts trump opinions in the stock market.

top current holdings up this week: TRCR 327% DRYS 99% GMCR 66% EXM 59% KOP 54% LFL 62% MOS 252% DECK 136% KHD 208% IMA 86% CCC 83% TTG 87% OMTR 346% CRNT 100% FSLR 116% ICOC 104% IHS 224% PRGN 56% HURN 101% SFLY 90% YGE 75% ASTI 109% ANO 264% OIIM 62% BIIB 51% APPY 125%

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