Saturday, December 08, 2007

SP 500 And Nasdaq Pullback In A Calm Fashion On Lower Volume, While The DJIA And IBD Indexes Continue To Rally

SP 500 And Nasdaq Pullback In A Calm Fashion On Lower Volume, While The DJIA And IBD Indexes Continue To Rally; Where Is The Volume And Where Are The New Leading Stocks?

December 7, 2007

Overall, it was a pretty choppy and inconsistent day on Friday, but it was still a good day when we take it and consider that we continue to hold well in the face of all the bad news from the subprime area of the economy.

I heard many complain that we did not finish higher today on the Nasdaq. I, however, disagree with them and find it more bullish that we finished a tad lower. That shows me that we are consolidating the gains, since the November 28th follow-through day from the IBD indexes, quite well. If we would have sold off today on heavier volume, then I wouldn’t consider the days action bullish. But the fact the we sold off a little and the volume was lower is exactly how you want to see the market pullback after adding on some solid gains.

Don’t forget that the DJIA finished higher, even though volume was extremely low, and that the IBD 100 and IBD 85-85 indexes finished higher. The big caps and leading stocks seemed to hold up well on a day of profit taking. So the people that were not happy with the Nasdaq do not have to look too far to find some other positives in the market.

The fact that we have not sold off at all since the follow-through day has to be taken as a great sign for the bulls, considering that the market was starting to look like it was read to fall apart. Even though we have not had an up day where volume was just simply huge, the market is still offering up enough stocks with solid fundamentals that the rally is working. Obviously, if there was more volume, the gains would be bigger and the longs would be more interesting. Right now, there are very few longs that look beautiful. Instead most only bring a little smile to my face. I still do not see anything out there that makes me want to jump up and down full of joy.

This market, this year, has taught us all something very important that I am not sure many appreciate. The market this year has looked like it is going to top multiple times and every time that it looks like the market is about ready to break wide open it almost always goes on to rally. During the years of 2004-2006 I had to convince people over and over that the market was not done rallying. Every time we would start to selloff, everyone would tell me that “this is it, it is all over.” But every time we would selloff, I would see many new top stocks with pretty bases setup.

That continued until this year. When stocks started selling off in February, very few fresh new longs showed up. Instead it took a while but eventually the market got its legs together and then some new longs showed up. The exact same thing happened in August except the lows in August were decently easy to spot since sentiment got so poor and there were a lot of charts holding up well into the selling. The rally that came off those lows, as many subscribers know, produced many quick big gains from top stocks that took off immediately. All the laggards however were quick to rollover.

So when the selling started in November it appeared that the top was finally in as all our leading four-horseman stocks started selling off on heavy volume for the first time. There was no time before when all these leaders sold off on heavy volume. However, as soon as these stocks started selling off, the stocks that were breaking down started to hammer out short-term lows putting a floor in this market which then turned the leaders around and now have them back into high ground or near high ground. If this hasn’t just been amazing to everyone, then it is obvious you have not been watching the market close enough.

Those that have been watching this market know that the constant rallies in the face of this strong distribution is just amazing. However, the new highs in the leading stocks are coming this time without something: volume. Where is the volume? Where is the accumulation? There is none. What we have instead is a market that seems to have been so oversold that a rally had to happen.

The past few weeks I went out of my way to show you the sentiment in the market on almost a daily basis. Well I do that during bad markets because it is very important to follow. When a real bottom is put in there are a lot of sentiment indicators that hit certain levels that confirm the price and volume that a market has probably put in a low. Well if we use the August lows as the bottom, then the market is still in a period to continue to rally. But if we count the selloff from November as negating the August rally, which is what I believe we have to do when you look at the SP 600 and Russell 2000, then we simply have not had the bearish or fear needed to put in a bottom.

Instead we have put in a short-term bottom due to the market being extremely oversold. If that is the case, then the low volume on this rally makes perfect sense. If this rally was on huge volume, I am sure I would have a lot of pretty green BOP filled charts that work (like RICK) instead of charts that are working but that don’t look at hot (like ELMG and its yellow BOP). So the fact that there are so few hot charts and new leaders breaking out from sound bases and that the current leaders off the 2003 lows (GOOG RIMM BIDU AAPL AMZN) that are now hitting new highs with negative divergences in almost every technical indicator including overall volume.

The first stock we can look at is GOOG. If you notice that GOOG is very close to its November highs but look at the bottom part of your charts. Where is the volume on this rally? Now look at the RS. Do you notice that it is well below the old highs? Then look at the moneystream. Notice its negative divergence. Now look at the BOP. Notice the negative divergence? This is just one example.

The next weak past winner I am watching is RIMM. I technically should be short a little of this stock but my luck on the short side has been iffy recently and almost all of my nicer looking longs have been producing solid gains during the market’s uptrend. As long as the market continues to drift higher, I have to stay away from shorting RIMM until it sets up in a picture perfect historically high odd trade.

Right now, the stock is weaker than all the others as it put in a lower high at the end of November with the RS line coming in well below the old high in early November. That high came with four days of distribution that has been followed by a few days of a low volume rally. If the stock fails again, I might begin to poke a little and try another round of shorting this former leader. However, it would probably be wiser to wait for the 200 day moving average to catch up more to price before getting too big on a short in this stock. If you look at the moneystream you can see that it is making new lows well below the early November s lows. This, despite the price being above the November lows. Also the BOP is red and ugly still just like it was when it started selling off. So it is obvious there is not a lot of accumulating interest in this stock anymore. A weekly chart shows three weeks of distribution the past four which clearly tells you what is going on with RIMM.

BIDU is another leader that is at the old highs in early November but yet nothing else about the stock is. There are negative divergences in almost every indicator with the RS well below the early November highs and moneystream is even in worse shape. The only thing going for it is that BOP is turning green but with the rally coming on lower and lower volume BIDU appears to be headed the same fate RIMM and GOOG are headed for soon.

The strongest leader relative to the market is AAPL with its RS line well into new high ground. While the RS line is deeper into new high ground than price it isn’t by much and then the moneystream is still no where near new highs. That line is still well below the old highs in November. The BOP has also turned negative to where it was still dancing around the zero line early in November.

The point of this is to show you that the leaders that everyone is still talking about as the for sure thing that is a safe haven in any market are all starting to weaken. This is the first time they have sold off on heavy volume and rallied on lower volume to such extremes with all the technical divergence. This action in the leading stocks along with the weak rally in the market with few hot new longs is what continues to keep my mind cautious on the rally. However, even though I am cautious and I expect this thing to fail it sure doesn’t mean that I am just going to ignore the long side and miss gains in stocks that can rally fast in a short period of time.

Sure there are not a lot of RICK stocks out there but there are plenty of EGN stocks out there. And being long EGN is a lot safer than being short stocks that are not moving down. I know a lot of people shorting banks, home builders, and mortgage stocks down here. It is just shocking because most of these stocks have been destroyed and have no chance of going to zero. However, what is obvious to everyone usually no longer works and I think those short sellers are in that situation. Not only are they in that situation but those that continue to believe that AAPL, RIMM, BIDU, and GOOG will always be a safe place to put money to continue to rack up gains are also in that situation.

The best bet is to keep bets small, keep them focused on the long side in the top stocks in leading industries until we get some real distribution in this market, cut your losses fast if they don’t move up immediately, and do not focus on the short side just yet. There are markets that are meant to be traded and then there are market that can be traded but shouldn’t. That is what this market is to newbies. This is not the market where we are going to get a TASR or TZOO. We are not going to get those until we have a serious selloff in equities.

I know some think that we have had a real selloff already. But no real selloff is under 20% and no real selloff comes with a bottom without fear. Where is the fear? It sure seems pretty darn complacent to me. As long as the complacency continues to reward the longs I will be complacent and ride the trend up with my friends like EGN RICK FFH and OTEX. Now if only the speculative former max green stocks like AGX would move like the other slow safe Utilities, Telco, Soap, and Insurance stocks. Then we could have some fun. Instead we must be happy with a 25% gain in all the stocks that give us that. We will not be getting many 100% to 300% gains in this choppy market. Enjoy what you can get when you can get it. This is not the type of market to be on full margin. The 2005 lows was the last one that had enough fear to produce a gain like 550% in six months in ERS. Since then, there has been nothing.

Aloha and I will see you in the chat room where I will do my best to find the next TASR. Just don’t expect me to find it until after we have a real bear market. ALOHA!!!

top current holdings: ICOC 88% YGE 70% FSLR 262% MTL 92% MA 322% MOS 343% ATRO 55% CNH 138% ZIXI 181% RICK 97%

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