Sunday, January 27, 2008

Very Volatile Week Ends With A Very Bearish Reversal On Lower Volume; Stocks Close Out The Week Mixed, With Big-Caps Higher And Tech Lower

A very bullish open, that I believed was going to send stocks to their follow-through day, was immediately sold and was sold the whole day, without the bulls ever getting a chance to mount a rally. Well, I guess they did near the end of the day but was anyone falling for that? By the close the 2% gain in the Nasdaq turned into a 1.5% loss as the big cap leaders and many other stocks hit resistance.

There was some good news in today's trading and that was with the IBD 100 index which managed a .5% gain. But that is more due to the fact that this index is now getting heavier into industry groups that are moving up the industry charts while the market remains in these soon-to-be past-bull-market-winners duds. So while the indexes get trashed we will start to see the IBD 100 outperform. But as long as the charts look the way they do in that index, it doesn't mean that it is worth buying.

Right now the chart landscape is littered with charts that are full of heavy distribution and light accumulation with very volatile price action. That is not the kind of environment where you want to be loading up on stocks that you think are bargains. If the pullback would have come on lighter volume and the volume was a tad heavier now on the rally, then I might say something different. But the problem is that there is simply no good looking charts minus a few very small-caps. But when stocks like LSR are the best of the breed, then you seriously have a market that you need to stay away from, especially if you are new to the market. Even though you might not understand it, you have to realize I can see things in the charts in a similar way a doctor can see something in an xray you would just stare blankly at. There is no difference.

The gameplan, for me, as it stands right now, is to focus on about 11 stocks that I want to get short and to keep a very large supply of cash on hand for the rallies that come. In these rallies there will be good stocks to trade for a short period of time as the best charts will definitely stick out when they appear in this rough market. Just like LSR is the only one that is round in this one. It is the nicest one I feel, right now, but the problem is is that it is too thin to even THINK about getting a large position rolling. However, some subscribers are curious to how I am still long 48 stocks. Well it is easy to explain: they are still moving up and are ALL above the 200 day moving average. If my final cut loss is that line, as long as I have a profit, then obviously the trade is still valid and the bear market is not ravaging the stocks like it is other stocks.

At the same time a lot of people are wondering why I am not keeping up with some subscribers who are profiting around 25-35% this month solely on my picks. The answer to that is that I am just starting to get my shorts going in bulk in the stock I wanted to get short in bulk. AAPL and GRMN have both already given me 20% gains on the short side which has helped turned my account from a -4% loss earlier this month to a current 7% gain. Just at the start of the week I was down 1%. So the big-cap past big winners are definitely starting to show their power of providing big gains. The best part is is that their selloffs appear to be just starting. So some very large gains should be around the corner--it could be next week to six months (NOBODY KNOWS!!)--but nothing is for sure and we do have our game plan to cut our losses, should it not be time.

Right now, I am short 80 stocks but only 7 are going to be of any size come Monday's closing bell. Besides that I have 73 stocks that make up around .5% of my port each. If I can get short the 11 stocks I want to be short my optimum portfolio balance should be 65% short, 25% cash, and 10% long. That is if the market stays very bearish. With that portfolio arrangement in the shorts the 11 stocks would represent 90% of my short positions and the other 73 shorts would be 10% of my shorts. AAPL and MOS get $10k to $25k and ING (for example) got $800. So even though some of you think that holding 150 stocks is a lot for me, it is like holding 15 for you. If you held 30 stocks, that is like me holding 300 stocks. That doesn't mean all 300 are all the same size. It normally means 290 are 15% of the port and 10 are 85% of the port. So when I focus, I focus. But instead of holding on to cash, when you get the returns I consistently do with ALL my stock selections, I would much rather be in shorts or longs.

But at this particular moment with the market moving around 3-5% intraday on the Nasdaq almost on an every-other-day basis starts happening, many traders seem to believe it means that we are hammering out a bottom. In fact, that is the opposite of what history has told us happens with this kind of action. For our most recent example we only have to go back to the year 2000. If you study the top in 2000, you will see that after the initial selloff stocks got extreme volatile, the charts were destroyed, and many perma bulls got their behinds handed to them. The reason: it was way too early to go long. To even catch the swings, is only for the best of the best, as they know how to sell into rallies and buy the dips correctly. Few new traders can do that so the fact that I hear some interested in this trading methodology has me worried. Well not really worried for me, but worried for the bulls as this is just another sign of the market topping. Too many newbies, especially from China, are in the game that shouldn't be.

All indexes have sold off hard world wide and the fact that mom and pop all over the world see the market as something that is just volatile and that will come back if we are patient is not how mom and pop sounds at a bottom. When a real market bottom occurs mom and pop finally have given up on their financial statements that they see in the mail as they can not continue to take the losses. Sometimes they lose faith quickly and most of the time they lose faith very slowly. The fact that most people have their "hopes" up (when they should be fearing) that a change in office will make things all better is another worrying factor for this market. But the bottom line behind all of this is that the retail crowd still is very hopeful and have faith that stocks will come back. They are right, however, the real question is how long will it take for this market to come back? Most of the people I talk to think this is a dip to buy. So I just don't see the fear, much less the HOT green charts setting up in perfect bases ready to break out on huge volume.

The lack of fear can be clearly seen in the contrarian indicators that I love to look at. I know we are going over these a lot but you have to understand that as the market sells off there are going to be a lot of false rallies like the current one that has quite a few calling it a bottom here. By watching these fear indicators, along with the indexes for follow-through days, and stocks for a whole new set of fresh groups full of stocks breaking out of sound bases, you can help spot the bottom.

And speaking of helping spot a bottom, my weekend piece for RealMoney will be on the stock market indexes and how they looked like when they bottomed in 2003 and in 2005 (when NOBODY believed the market would rally) and what they look like now. I will be able to show you that by reviewing the old index charts of the Nassy and SP 500 what to look for when you get a real bottom or a cyclical bull market bottom. Then we will look at our recent lows and I will tell you why it is all wrong for now but why the rally attempt is still alive (we are above the lows in January)

Back to the subject of fear in this market, the first obvious problem we have is that the put/call ratio FELL on Monday when the Nasdaq gapped lower by I believe about 5% and closed 2% lower. On that day, the put/call ratio should have shot to the moon, if fear was massive. Instead the put/call ratio fell to under 1.2 from a 1.33 reading , defying all sorts of logic and proving that right there in the face of some very scary selling, possibly brought on by Societe General. This along with the put/call below 1 now at .91 indicates to me the huge amount of fear that needs to be in this market is not.

Then we have the VIX. Where do I start with the VIX. You can probably do a search of "hate, VIX" and come up with 100 entries. If the stock market does bottom here (would be a miracle) and stocks rise we can say that at least the VIX made higher highs above the August highs and did confirm the lower lows in the market. However, once again, just like what happened in November, the VIX immediately makes a new high and reverses. It opened over 35 and went to 37 very quickly but within a few hours was back below 35 on toward a 31 close. And now here we are on Friday with the VIX still below 30 at 29.08. I am sure it is possible for us to have bottomed here as I am ready for ANYTHING. But if we do bottom here with the charts, it is still going to take weeks to months to fix the mess out there, and if that happens the VIX will be back below 20 before we know it and big gains will be impossible to come by when the VIX is so low. We need those premiums and 20 is not a premium. Call me when we hit 40 to 70 before I will even consider us at a possible bottom.

Just for reference, before the stock market follow through on 3/17/03, the VIX, after dipping initially off the 2002 lows, rose back to a high of 41.16 on 3/12/03. That move over 40 came just three market sessions before the market took off to never look back. This goes to show you that we must keep our eye out on this market if the VIX does hit 40. The day the market hit its bottom of the bear market in 2002 on 10/10/02 (I told a CPA a few days before this date that the market was NEVER coming back--oops), the VIX made an intraday high of 50.48, proving again how important these numbers are when looking for a bottom. 50 is the best but at 40 you know you need to start looking for a bottom some time in the future. In the meantime stocks can continue to selloff, but you must be aware of a bottom or bounce while this is happening.

In 1998 another important bottom I remember pretty well (I was still partying hard then) the VIX also hit over 50 (53.43 on 9/1/1998). And finally the highest reading I have ever seen which would be a miracle if we ever get this along with a follow through day was on 10/20/1987 when the VIX hit an amazing 172.79--a mark that will probably never be seen again. During this time, the VIX went from 21 to 172 to 55 in a little under one month. What an amazing right. What is the point of this? To show you that we are not at a bottom!

And the final contrarian indicator that I follow, the investors intelligence survey, shows that the professional newsletter writers are still bullish. Just like they have been the past two years. The bulls sit at 41% and the bears sit at 31% which is very close to a cross but not quite there yet, showing that the newsletter writers are no where near giving up yet. The even more clear sign that they are not ready to give up yet is that back in August, when the Nasdaq was almost 9% higher, the bulls were at 40% while the bears were at 38%. There is no doubt that back in August they were much more scared and afraid of the market selling off. Now even as the market continues to swoon, they are less bearish than they once were.

The last time the bulls and bears crossed was back during the October 2005 pullback. What was odd about this cross is the fact that the Nasdaq and SP 600 were well above their April and May '05 lows. However, the bears showed up higher than the bulls. During this time the crowd was very bearish and there was a fund manager trying to get me to Chicago to run his money because he was for sure the market had topped and that we were entering a long bear market. During this time he was going to teach me how to take over his fund. Well if someone like that thinks the market is "done for good" and could not see the nice charts during that time like the one I told him to load up on (CVO) then he was not going to be someone I was going to work for. I am still VERY happy I said no. Chicago or Maui???? Tough choice! LOL.

Going over everything that has been posted here should make it clear that the market is not offering us what it needs to offer us to make a real great low. Instead it is holding the recent lows thus putting us in an official rally attempt. Monday will be day four of the rally attempt for the SP 500, 600, NYSE, DJIA, and the Nasdaq. Therefore, if we get a rally on gains of at least 1.5% on higher volume than the day before then it will be time to start looking for stocks with great fundamentals setting up and breaking out of well formed bases. If we get that, then we have to stop being so darn bearish and we will have to reevaluate our short positions and enjoy the few longs that will be doing well.

If we all of a sudden have brand new groups start to move up on massive volume and the market starts making big gains with low volume pullbacks then obviously I will get more bullish on a longer term time frame. However, you normally do not see big gains and the best stocks make their biggest runs in a bear market rally. So until the indexes start trending up there isn't going to be much to do other than get short the past leaders that gained at least 1000% druing the run-up and build a nice cash position for when the real bull does start. For now, it will not be starting when the Fed is just starting a rate cutting cycle and while the market is selling off on huge distribution.

With new lows killing new highs, Medical groups compromising 10 of the top 20 top industry groups out of 197 groups, and the major market indexes, including the IBD 100-New America-85/85 indexes, all having D- to E ratings for Acc/Dis ratings it is doubtful that any bottom is to be had any time soon. I obviously could be very wrong. But the stock market, the gains I am accumulating, and the huge gains my subscribers are building up so far are telling me I am still right.

I will have the RealMoney article up by the EOD tomorrow showing you the difference between our recent lows in this market compared to some important stock market bottom follow-through days from 2003 and 2005. I might even throw 1998 in there but I might not have enough space. The editors only want so many words so I do not have a choice in this decision. Until Monday, have a great weekend--I am going ziplining in Hana--and ALOHA!!

By the way, I did an interview with, on Thursday, and that can be found here.

top holdings (shorts) up today: PTEC 91% MCF 104% (SGMS 43% SHOO 41% BEN 20% ATI 33% MI 25% MSTR 25% ASF 21% COH 27% CLP 25% RNT 25% LVS 28% MSM 20% AAPL 27% GRMN 31% FAF 21% SGP 22% ING 26%)

Monday, January 21, 2008

Worst Week For Stocks In I Believe Five Years Leaves Behind A Wasteland Of Broken Charts

January 19, 2008

There is no other way to describe what happened this week as anything other than a major breakdown in all the major market indexes. The worst part (if you are a natural bull) is that the breakdowns now have every single major index with the 50 day moving average below the 200 day moving average. The Nasdaq was the last index to accomplish this “death cross” feat.

To make the declines this week worse, the averages sold off on heavier volume, with volume Wednesday, Thursday, and Friday on the Nasdaq reaching levels we have not seen since the mid-August sell off. The indexes are under major distribution by large institutional investors and there is no way with this amount of slow distribution (instead of a one day crash) is going to be followed, right away, by large amounts of accumulation. This market has cracked and broken wide open.

For those of you who are still bullish out there, it has to be due to ONLY one reason: you are a complete neophyte to the stock market. There can’t possibly be ANYONE who has been involved with the stock market for over a year that wants to load up on stocks here–that is except Doug Kass, my fellow colleague at RealMoney, who wants to load up on stocks here. Is he an idiot or what? This guy has been a hardcore! bear for over two years missing out on a TON of good gains (like MOS and TNH) all the while screaming about the upcoming recession. Now FINALLY he is right and he is now bullish? If there is anyone who you should probably NOT listen to about the stock market it is Doug Kass. The guy is brilliant at finding great short candidates but when it comes to the market he is about as in tune as WillPS (I love you Will, you have to realize this is for your own good but I really do want to see you succeed which is why you are being mentioned so much!!).

Something that I think bears much more hardships for the market is the way it reacted to the news by President George W. Bush. He announces a stimulus plan the size of $150 billion which is 1% of the GDP and the market takes its gains and turns it on its head leading us to close lower on the day? That is definitely a market I want to stay away from. There is no way news like this should have been received the way it was. It is a clear sign that ANY good news, besides bad news, is going to be sold.

Bush’s tax cuts in 2003 helped launch one of the most resilient bull markets we have ever seen. However, now, the market only laughs and instead of rewarding the stimulus package just says “sorry, nothing you do is going to save you from this.” This market has topped and if you need any more proof than this and your dwindling capital in your trading/investing accounts, you have some serious psychological problems and need to probably A) start reading all the books in my book list B) stop trading for now or C) stop trading forever.

Another thing I keep hearing from the foolish newbie crowd or the gambling buy-and-hold crowd is that these winners are going to come back as they are at “bargain” levels. What these dolts refuse to see is that this is the same BS we heard just seven years ago. Where in the heck are their brains or their history books. Have they not learned their lesson or not learned the lesson of history?

I remember clearly in 2000 how every single dip in YHOO EBAY MSFT CSCO QCOM JDSU AMZN was a “bargain” to be bought for the huge gains that would be coming again. Why don’t some of you go check your long-term weekly charts and tell me how those stocks rebounded. Then I want you to do a % return scan on your charting softwares and see how many stocks in each year went up over 100%. As you would see, if you actually did this exercise, there were a TON. By buying the bargains you prevent yourself from buying the next big winner. By the way, how is TASR and TZOO doing. I remember how AFTER the stocks topped how everyone said every pullback was a bargain. Wasn’t there even a TASR ticker on CNBC at the end? I could be wrong but for some odd reason I thought there was. I was playing more poker than watching CNBC that year.

By the summer, we will probably be up-to-date on most of my past big winners with HOT charts in my ‘past big winners’ section. Once it is updated, you will quickly learn that most of my big winners were fresh brand new stocks that almost no one has ever heard of. JUST LIKE CANSLIM TEACHES US. And those gains in those stocks NEVER had severe selloffs from climax runs like many stocks this year have. There are climax runs everywhere and almost 99% of those stocks will NEVER come back to be a huge winner. The bottom line: You are NEVER going to find a RIMM, GOOG, BIDU, or FSLR after they have already had one huge bull market. The exception, you might say, is AAPL. But technically Jobs rebuilt that company and turned it into a NEW COMPANY. The IPO was basically in 2001 and by 2004 we had one of the best stocks of the five year bull market setup and break out of a beautiful base. Sadly I only received 200% of this 1000% gem.

So now that I have convinced you–probably not the newbies but you know what I can’t care when their ignorance blinds them from the truth–that you can not buy the next big stock market leader from a group that was once part of the last big bull market, maybe that can convince some of you to stop trying to buy the stupid dips in stocks like DRYS, MOS, IHS, MA, and GOOG and instead to start looking at rallies as places to short.

Even if we put in an oversold rally that last for months (just like the rally in 2000, early 2001, after 9/11, and the small one in the summer of 202), there will be chances to make money on the green charts, like FFH, in select defensive stocks like Medical and Food stocks. And even right now Medical stocks are good areas to go long as 10 of the top 20 industries based on six-month price performance in IBD are Medical groups. Quite an impressive showing for a sector! But with the rally in Medical stocks, the losers that have topped will also rally. Those are the stocks you must not get fooled into buying back, thinking you got a “bargain” or a “value.” Those are the stocks the talking heads on CNBC want YOU to buy so that the smart money can unload on your not-so-smart behind. Why people keep falling for it is beyond me. But when you don’t take the time to learn about either politics or the economy, you deserve what you get. You fall for the BS, you deserve the punishment. Being “ignorantly bliss” is the equivalent to a horrible disease. I know I don’t want to get infected by it.

As long as you newbies can not fall for the crap you hear on CNBC and learn that REMEMBER!!! we buy new 52-week highs, NOT LOWS, then you will save yourself a lot of pain. If you ignore my market battled-and-tested warnings you will pay for it dearly when the market finally has enough of you. It will chew you up and spit you out.

Recently, I must admit, I have hit a major funk of depression, just as I have been asked to work for RM. Thankfully, that gig is working out but for the past three months I have been in a trading funk UNLIKE ANY TIME SINCE MY FIRST MONTHS OF TRADING. I was blessed to learn the CANSLIM strategy first and it IMMEDIATELY made sense to me so I was blessed in that market environment. I could do no wrong and I lost enough money in the 97 and 98 pullback that by the time the 2000 top came I already knew how to protect gains. Not only that but my shorting worked perfectly in 2000. But what I keep forgetting is that from April to August I did have a rough time as I was only going long stocks again and while I got a few winners (go check the past winners section) on about 70% of what I bought I was cut out of rather fast and with decent losses. But the trend turned back down and I went back to shorting which at the time could do you no wrong.

The one difference from then and now is that I keep loading up on the wrong stocks. These exact same perfect setups or really strong setups has worked for me for twelve years but now all of a sudden I can’t get anything I buy in bulk to work. My last large trade was AFSI which I still only put 5% of my account in after a teaser buy of 1% of my account. 6% is not a big position. The last time I went to 10% of one was HRZ in late 2006. That pattern is the one you should burn into your head. That HRZ pattern simply does not get any better than that and the next time I find one like that 20% of my account will go in it. But if that pattern showed up tomorrow, I probably would not buy 20% of it.

For the first time that I can remember, I am having my third straight month of horrible performance. Now, by horrible, I know me and you have two different definitions. You might think horrible is losing 20% while the market lost 10%. Well, this year the market has lost almost 12% by the Nasdaq while I am down 4% on the year. Now I know some of you must not understand how that can be when I have these kind of gains in short positions: (FAF 28% FRT 20% CLP 32% ASF 25% FDX 23% ESI 20% XLNX 24% COH 40% MI 35% FTEK 30% MSM 26% HUBG 21% PVH 27% ATI 34% LVS 34% MSTR 26% CBEY 22% RNT 33% SGMS 46% BEN 28% MHGC 21%-in-four-days). But the matter of the fact is that I did not consider any of these to be fully perfect shorts so I did not load up on any of them. What have I loaded up on? Well I will tell you one perfect short setup that failed (AMX) while keeping the rest secret to this section as I have become paranoid that if I talk about them they will go the wrong way. However, AMX perfect setup on 1/2 failed on 1/10 but immediately freaking rolled over becoming a candidate on 1/15. Of course I passed again and now it is down almost 7% since then.

Then we have FFH long. I was long that stock but at the start of the year it took me out. Now look at it!! Another perfect move over the 50 day moving average (not a perfect setup–don’t get that confused). So, once again, I have been whipped. The bottom line is that things are not going well in my trading and it seems that if the pattern is extremely nice (and I am sure no one else has their charts like mine that have millions and millions) and near-perfect to perfect it fails. And if the pattern is good to really good then it acts like the stock was perfect. I think that if this was a bull market now and HRZ setup in its 2006 pattern, it would fail. So my psychology is off. I know how to fix it and it is to step away but I can’t do that so instead am going to keep everything small until I can load up my shorts in GOOG RIMM AAPL BIDU FSLR MOS TNH etc when they setup in their perfect short setups. If you don’t know what they are….BUY THE BOOK HOW TO MAKE MONEY SELLING STOCKS SHORT by WILLIAM J ONEIL. The two books he has written on the markets, if you read them slowly or read them a LOT, will completely change your life and make you a stud when it comes to trading stocks.

When it comes to trading futures, don’t ask me. Ask David, in our chat room. I do not have a lot of interest and I believe that he is beyond qualified to teach you this professional technique. If you are a newbie and can not even make money going long stocks, don’t you dare think about trying futures. It is much harder than trading stocks. It moves a lot faster and has much higher risk as you can borrow a lot of money for a little money.

Is there anything that makes me think we are going to put in a real bottom any time soon? LOLOLOL. Are you crazy?

Is there anything that makes me think we could put in an oversold rally on the short-term. Absolutely and the first thing that excites me is that the VIX is finally moving. The fact that it has just started moving higher is probably not good for finding a low just yet. But a little more of a rise in the VIX to the August highs could lead us to an oversold rally. But hopefully it will not last long because we need to really wash this market out of weak hands and set up and start the process of stocks building nice long max green BOP filled bases. These beautiful long term bases are what leads to market like 2003.

This market is way too far down right now to have a 1999 type rally but that market had shallower bases but the stocks that were momentum favorites and in top industries pulled back on no volume with BOP staying max green or just green. Do you see any max green BOP filled stocks that trade over 100k a day and are over $10 a share? Nope. Do you see any that are pulling back into nice tight bases, besides Medical stocks and FFH? nope.

Chances are that this is going to be a very long drawn out bear market that is sprinkled with a recession on top. You better take those bull goggles off amateurs. You are hearing this from someone WHO WAS A BULL FROM THE OCTOBER 2002 RALLY TO THE NOVEMBER 2007 TOP. DURING THE PULLBACKS IN 2005 AND 2006 WHEN EVERYONE WAS CALLING A TOP I CONTINUED TO NOT CALL A TOP BECAUSE HOT GREEN TO MAX GREEN FILLED CHARTS EXISTED. In 2007, I was premature a couple of times, but as soon as the lows and a follow-through day were printed I immediately turned and helped you make money on stocks like TESO AFSI DRYS FSLR, and APPY to name just a small amount. When November’s selling came, I saw something very different. And I still see this now. No green and all red. This is going to take a long time to fix.

Aloha and I will see you in the chat room where hopefully I can get over my small losses and realize that I am still beating the market by a significant amount. Even though all of you are crushing me. I still feel like a loser and I am still upset over it but don’t think for ONE SECOND that I am not completely stoked and happy for you all. I am so proud of all of you that are making money in this market. I remember the 2000 market and the whole situation like it was yesterday. I remember watching $500k turn into $11k in some peoples accounts as they bought every dip and refused to short the rallies. I am so proud of you all (not you WIllPS…yet) and continue to wish you all the best in trading. I hope I can make you all filthy rich and as a byproduct I pray my trading turns around and the next HRZ, TASR, or even FMDAY (2006,2003,and 2004) will blast off to the sky just like they did last time and that my confidence will be up to the point that I can put 25% in each of these bad boys. I am in a major funk but am only down 1% from the November highs while the market is down 18%.

It is very disappointing to have this run but preserving chash ALWAYS KEEPS YOU IN THE GAME TO FIND THE NEXT TASR OR LMLP (1999). Once again, aloha!

Saturday, January 12, 2008

Oversold Bounce Has No Bounce As Stocks Selloff All Day Long On Lower Volume

The stock market ended the week the exact same way it started and that is with a lot of selling. On Monday the market found support intraday to stop it but on Friday there was none of that support as the market took the bounce that started on Wednesday and slammed it to the ground.

Now, I know a lot of people that are chart watcher want to be real bearish here, especially since the retail public has been brainwashed to buy these dips, but the fact is that we are still above the Wednesday’s lows and that the market’s bounce is in fact still intact. And the other item I see is that volume was lower on today’s move lower than on the previous two days of gains.

But there is one obvious problem I already see with this bounce. There are still no fresh stocks breaking out of beautiful properly formed bases on strong volume. Therefore, there is no way that we can expect anything more than an oversold bounce right now.

I have discussed this market so much the past week here in this little blog that I am finding almost impossible to say anything new about it. But I do see something that appears to me to be very bearish. In fact the bearish indicator is an indicator I hardly use but I put it on my chart for moments like this.

The moneystream line is an indicator that I almost know nothing about. What I do know is that when it makes very bullish or negative divergences it has a high correlation of hinting at a possible big move by the security or index. Well there are two indexes that I see with some amazingly huge divergences on the daily time frames.

The SP 600 and Nasdaq are both showing severe negative divergences in moneystream to price. The worst one is the SP 600. The price has just recently eclipsed the lows of November and December but the moneystream is well below its lows at that point. But even more noticeable is the moneystream at the November and December lows compared to the August lows. The moneystream was making new lows in November way before price was and by the time price went below the previous low the moneystream was waaayyyy below the August lows. This hinted at possible more declining prices then and it was right as the November and December lows have now been taken out. And the fact the moneystream is still hitting new lows confirms that the trend should continue after this bounce is over.

Not only is the moneystream leading price to new lows, the RS line is doing the same thing. The RS line hit new 52-week lows on 11/1 which was twelve days BEFORE!! the price hit new lows. On the December bounce where price went back to touch the 50 DMA, the RS line fell almost every single day. By the time prices turned lower again, the RS line was hitting new lows. It is also hitting new lows right now well ahead of its previous lows while price is just now breaking to new lows, confirming the weakness in this index. This bounce should fail.

The Nassy just recently hit a new closing low below the November and December lows on 1/4 and with that the moneystream followed but you will notice it is hitting a new low already. That is because back in November there were four consecutive nasty down days that took the index for an 8% decline. Even though the price was well above the August lows, the moneystream was already at the lows in August. After the weak bounce that started in November that just recently ended, the Nasdaq has resumed its selloff on higher volume. The moneystream with its huge negative divergence helped traders stay out of this nasty market. The little bounce we have had the past couple of days has been pretty weak and the moneystream is confirming this with it still riding the lows.

Sticking with the themes of new lows there were still an outstanding number of stocks making new 52-week lows compared to 52-week highs. There were 63 new highs to 453 new lows showing that this market is still extremely weak as every day this week had this kind of massive weakness.

On the other hand when it comes to looking for strength we continue to only see it in the safe/defensive sectors of oil, tobacco, metal-ore, chemical, household-consumer electronics, medical, retail-wholesale, consumer products, and foreign-banks. For some of you that are not familiar with these stocks you need to know that when all of these stocks are leading the markets are not bullish. They are normally in downtrends, just like this one is, and they normally stay in them for a long time. Since this leadership has just shown up, I think it is safe to say that this downtrend could last a long time. I wouldn’t go looking for a bottom any time soon if I were you.

Another clear sign that leadership is all wrong came when I decided to look at the industry groups making new highs or at the top of the list. When I did that I was surprised to see something that my scans are confirming (my scans ONLY look for strong stocks making strong gains). Medical stocks make up four of the top 10 industry groups in the IBD 197 industry group list. This is a CLEAR sign to me that we are in a bearish market environment where experienced investors should definitely be shorting the rallies and not buying the dips. Don’t try to outsmart the market. Better traders than you have tried to do this and have failed miserably!

There is even more evidence showing up that this market is weakening. Before when we were selling off all of the indexes would pretty much sell off at the same time, with exception to the two leading small cap indexes. Why leading? Because they were the two indexes that led us higher the whole way into the 2007 top. Only near the end did the big caps start to take a lead. Just like how they do near the end of every bull market. Now a few more indexes full of leading stocks are joining the small cap stocks in leading to the downside. Now we have both leading sectors leading us down. Not good.

The IBD 100 fell 2.3% and the IBD New America index fell 2.1% with the New America index Acc/Dis rating falling to D-. That goes along with the IBD 100 and IBD 85-85 indexes D Acc/Dis ratings. Those Acc/Dis ratings along with that kind of selling on a day the Nasdaq only fell .48% should be just one more red flag that keeps you out of this market on the long side. I just pray all of my subscribers have been listening to me and heeding my advice.

By the way to show you a bigger picture of the deterioration in the leading indexes you can take a look at this week. The IBD 100 fell 4.4% compared to the Nasdaq’s 2.6% drop, the DJIA’s 1.5% drop, the NYSE’s .9% loss, and the SP 500’s .8% small fall. The IBD indexes are not as bad as the Russell 2000 or the SP 600 the past six months or so but with a little bit more aggressive selling it could get ugly for those indexes. And that could happen sooner than later with a little bit of complacency coming back into this market.

The put/call fell to .89 which is not really complacent but it definitely is not fearful right now. Combine that with the important sentiment indicator from the investors intelligence survey showing bulls still around 50% at 48.4% and bears still around 25% at 25.8%. There is still no fear there and without that fear there can be no bottom. Speaking of fear. Where is it? The VIX at one point, intraday on Friday, was down while the market was down. But by the end of the day it closed up almost 1% to 23.68. The point is is that there is absolutely no way any meaningful low can be made until this thing hits 35 (like in August that gave us a lot of nice big winners in a short time) or any real long-term low can be made until we hit 50 like we did in October of 2002. So either 35 for a short term rally and if when that happens there are no HOT charts the next real great low comes with 50 and if still no HOT charts…look out below.

And confirming my look out below comments is the fact that when we look at the leaders like JDSU, EBAY, YHOO, QCOM, MSFT, CSCO, and ORCL back in 200 and compare them to the way they looked at the top to the way SPWR DECK MA MCD FSLR CMG ISRG STP PCLN WFR GOOG RIMM GRMN BIDU look now, you can see that they all look extremely similar. This weakness is just now starting to show up in most of these leaders and you have to remember GRMN was one of the very first leaders in 2002 that continued to rally all the way into 2007. Notice it was the first one to top and how violently it has sold off. When and if the other leaders look like GRMN and how the old leaders of 2000 did, this market will probably come in much lower than we are from now. Another thing to remember is that the leaders are just now starting to break down. This comes after the subprime, brokerage, and bank stocks have already came down. Just like how the internet stocks that were built on no earnings fell before the real leaders.

Oh how wonderful it is that history repeats itself and allows those that learn from the past the chance to profit in the future. Aloha and I will see you in the chat room, after a wonderful weekend of playoff football. GO GIANTS!!!!!! Giants vs Green Bay would be great. Indianapolis or San Diego (prefer SD) vs New England would be wonderful with a GB vs NE Super Bowl. That would be great. But Seeing the NY Giants in the Super Bowl sure would be great! Aloha!! Be careful out there new investors/traders!!

Sunday, January 06, 2008

Nasty Day Spreads To All Areas Of The Market As Stocks Tank On Much Higher Volume; Our Short Positions, Finally, Crack Wide Open Producing Very Large

Stock indexes tanked on Friday and there simply is absolutely no way to spin Friday's action any way to the bull side what-so-ever. I guess, you could say, that the market is very oversold right now after six straight down sessions on the Nasdaq. However, the ferocity of the selling, combined with there being absolutely ZERO nice charts setting up and nearing breakouts from fresh bases, leads me to believe that ANY rally we see off of these levels will probably fail as there is a TON of resistance in the short term.

When you combine the intermediate trend of the market, with the weak action on Friday you have a market that should seriously have you protecting your capital. Not only did the Nassy gap lower but it also closed right near the LOD. This shows that they were selling them into the close--they could not dump them fast enough.

When that kind of action starts showing up in the daily market indexes it is time to worry if you are heavily long. If you fail to heed these warning signs and continue to "believe" that your stock "will comeback" it is time to wake up and hear the truth: you should be selling down all of your holdings and if the stock is below the 200 DMA you should completely rid yourself of the laggard. This is not a market to mess with.

I have heard some bears mention that the volume was low compared to the August volume. After I was finished getting up off the floor from the hilarious BS, I decided that I must make this clear one more time.

Low volume rallies that are followed by heavy distribution is very bad but and low volume rally followed by ANY kind of selling is bad, even when it is on lower volume. Stock can sell off on low volume and can keep swooning for a long time. The 2000 selloff started that way initially and for a very long time in 2002 stocks sold off on low volume before putting in the lows in October. The point to remember is that any kind of selling is bad after a low volume rally. To have long sustainable rallies you need the backing of big institutional investors to keep prices higher. When stocks dip those funds come in to support.

But when those funds run out of money, they stop supporting those lows. If their favorite stocks then break those lows and keep selling on lower volume eventually they will have to dump them and then that produces the heavy volume. And by the time they are done, everyone sees it and THEN thinks it is a good short. But like usual they are late and wrong.

So the fact that we see this selling, rather it being on HUGE volume or tiny volume, it is bad, since we have no accumulation. Just look at our last rally in December. The gap higher on higher volume on 12/21 seemed very bullish and appeared the Santa rally was going to be a strong one. But soon after the stock rolled over, killing the gains, on higher volume but volume still WELL below the 50 day volume average. The heavy selling came AFTER the initial selling had already started. By 1/2 the index broke open giving you a clear warning to watch out for further price erosion when the Nassy fell 1.6% on higher volume. As was no surprise to the platinum subscribers, as you can see via the post below this commentary post, our shorts finally produced the huge gains that I have become accustomed to before the May 2006 top when the Nassy cracked wide open on volume well over the 50 day volume average. You can't say I did not warn you and that I did not tell the professional to get short; I definitely let you know what I was doing.

There are other confirming signs that the market is putting in a clear top. All of the tech horseman are either putting in lower highs and lower lows and/or are cracking lower on much higher volume. The best looking one of the bunch is AAPL and its chart still looks ridiculous on a long-term going back to 2004. The 7.6% drop looks very nasty after such a low volume uptrend. The bottom line is all the leaders (GOOG RIMM AAPL BIDU GRMN FSLR) are showing signs of distribution and severe weakness. When they go the market is going to really crack wide open. And to hint that it is starting, the IBD 100 fell 4.2%. If this index touches the November and December lows, I would think it would be breaking down right below those levels, since you don't see too many triple bottoms form in the stock market.

Since this is a weekend post and it is open to the public, I KNOW THAT THERE ARE MANY AMATEURS AND NEWBIES OUT THERE, I would like the perma-bulls (what I was called from the 02 lows to the 07 highs) to stop buying your favorite dips. Get real! You are not getting bargains. You are getting trapped! You could be buying a bargain that stays a bottom for years and years. How are all those YHOO bag holders from 2000 doing. Most of those bought it all the way to the bottom, I can remember, and if they held it the whole way most of them are just breaking even. Nice guys!

Some of you need to understand that some of your bargains are not going anywhere for a long time. This bear could last a month or it could last years. Nobody out there knows that; not even Cramer. The truth is unless the stock is going up you are wasting your time. You could get stuck in a loser for years that simply never goes anywhere. I wonder if there is anyone still long IWOV from my days back in the TokyoJoe chat room. I remember everyone saying it was a bargain at 90 80 70 and especially at 20!!!. Well almost 8 years later and those bag holders will still be in the red. Nice guys!

The point is: stop being a hero. It only makes you look foolish. I am still stunned at how ignorant most market players are in this game. This game is so difficult to succeed in that it is easy to equivocate it to poker. So many amateurs try to sit and play with the pros but when you turn on the TV you see the same player year after year after year. There is a reason for that. He knows the odds and doesn't chase. Most traders have no clue how to figure out odds and the one thing most newbies are great at are chasing. Stop chasing the bargains! You are going to end up in an IWOV and you will miss out on all the money all the short sellers who sold you the borrowed shares are going to make.

Let's just look at the losses for the weak. The Nassy lost 6.3%, the Spoos lost 4.5%, and the IBD 100 cracked 5.1% showing that leading stocks are holding up better than the market. Just like in 2000 when the best stocks like CSCO ORCL EBAY and MSFT held up during the initial selling, these leaders are too. The speculative stocks are getting hit but the horseman continue to hold up well because they are big caps. Big caps always fall after small caps.

That can be proven by looking at the SP 600 and RUT 2k. Both indexes led this rally the whole way from the October 2002 lows till the May 2006 top where big caps started showing up. But then the small caps retook the lead again after the March rally started till the July top. But then the big caps took over and ever since then the small caps have lagged. Now they are both hitting new 52-week lows while the big caps continue to hold.

What is funny about all of this is that I do not hear anyone talking about the fact that small caps are leading us to the downside over the big caps. This should be mentioned with the fact that they led off the 2002 lows so that most investors can understand that what was leading is now lagging.

This is clearly a market in a correction and a lot of people are wondering if we are going to have a black-Monday. Now, while I laugh at the absurdity of the statement, I realize that anything is possible. But the fact that everyone is talking about it is probably a good enough reason to believe that it will not happen. But we must prepare for a black 2008 as it is shaping up to possibly be a very ugly 2008.

What makes me think this is that by looking at my past big winners in 2000, you can see that I had some nice ones in a poor market. Right now the only pretty one remains RICK. And I have sold out well over 1/2 of it. If you compare the nice charts that exist now, you will see that there is absolutely NOTHING setting up in a nice green to max green BOP filled round base with perfect price and volume action. Even after the wide crack of the 2000 market, there were a few stocks in a few sectors that poured it on with significant outperformance over the Nasdaq which swooned. You would think that there would be a few more DSTI type stocks out there. But there isn't and, to be honest, DSTI is a sub-$10 POS. Stocks like CRUS and COCO which had price, volume, and BOP like DSTI, do not exist in this market. The last three CANSLIM HOT longs were AFSI, TESO, and HRZ. Since then, nothing.

So if any of you are out there buying stocks, you are making the wrong play. Being short is obviously the right play and if you argue with me and the market, you are not a "genius," you are a "dummy." The best traders since the days before Jesse Livermore were trend followers. They went long the market when the long, middle, and short term trends were up and went short when all those trends were down. So why are you buying the dips and shorting breakouts? The best traders buy breakouts and short low volume rallies from heavy volume dips to new lows. People that refuse to follow the general trend of the market will never be able to make money consistently YOY for the rest of your life.

You have to understand, to make a living doing this, I need to make money now. I don't have six years to wait to see if my WRONG stock pick comes back to be right. I buy and it moves higher. If I buy and it moves lower, it is cut. This is how the best did it so this is the way I am going to do it. I am not trading like Cramer, Kass, or Marcin. There millions and billions have time to work. My money needs to work now!!

Before we end this I want to go over two more points. Cutting your losses and longevity.

Some of you are not cutting your losses immediately after you are going long. I am getting some emails from some HORRIBLE traders. I can say that because some of you "non-subscribers" are telling me you have been trading for two years plus BUT YOU ARE STILL GOING LONG STOCKS THAT ARE IN LONG TERM DOWNTRENDS, like the stock TRAK. What makes you buy a stock that is selling off on large to huge (12/6) volume? Aren't you studying my past big winners? Do any of them look as ugly as this? Aren't they LOADED with max green BOP and big tall green accumulation bars with nice round bases? OF COURSE THEY ARE. Your longs should be too. If your stock is not ABOVE the 50 AND 200 DMA, you are in a CRAP stock. The best stocks START their biggest, longest, safest, and least volatile runs AFTER they are above BOTH the 50 AND 200 DMA. If they don't work, we always have the moving averages to use or if you are a complete newbie and the moving averages are too far away making it too risky you can use the cut loss method below.

(FROM INVESTORS BUSINESS DAILY) If you sell a stock when it drops 7% from your buy point, you need just a 7.7% gain to get back to even. If you let that loss grow to 25%, you'll require a 33% profit to get back to even. A 33% loss requires a 50% gain to even the score. Let a loss swell to 50%, and you'll need a 100% gain to return to square one. At the start of a correction, you don't know how deep the losses are going to go or how long they'll last. Taking a defensive stance protects you against that uncertainty. (FROM INVESTORS BUSINESS DAILY)

Using a hard 7% rule will prevent you from EVER taking a hit that will destroy you. If you don't put more than 5% of your cash into any stock and you ALWAYS cut your loss at 7%, there will be no way you can EVER go broke. You will be able to live to fight another day for the rest of you life. Only when you decide to quit will you lose.

The last point, before I go, is to remember that most of the greatest traders took five to seven years MINIMUM to learn how to make money month-after-month year-over-year. They fought and clawed their way higher never taking their eyes off the goal that they were after. Livermore, Loeb, Baruch, Darvis, Ropel, and many others took years-and-years of hard knocks and extreme highs and lows before it became "easy." Investors like O'Neil took their time learning before going "all-in" in the market and their success came immediately. But the best traders, including the best Jesse Livermore, usually take five years to get it down perfectly. And that is because, just like a doctor, dentist, or forensic scientist this "game" is a science and an art. Both the left and right brain must be used to see the patterns in the top stocks that reveal the clues that make the best The-Best.

Take your time, tread carefully, invest with caution and ONLY in the best stocks trading over $10, and in time and in a bull market you can watch your light shine. Be careful out there and do not bottom fish the "bargain falling-knifes." Aloha and I will see you in the chat room!