What looked like was going to be the session before a possible breakdown turned into a bullish reversal by the close, after word of a bailout of the bond insurer ABK. Now, I am not here to discuss the ethic of CNBC of this news and to be honest I could really care less as I think watching CNBC is a waste of time (I just tried to watch it again, recently, and that lasted 30 days). So if you were watching your charts intraday, the spike looked the same as it did on CNBC. It really doesn't matter what the news announcement was and anyone that thinks that this changes anything must not remember the last time CNBC did this last month. LOL. Different players, same game, with CNBC. You are best to just turn it off.
By the closing bell, somehow all the indexes, based on that rumor, turned what was looking like pretty nasty losses into .8% gains on the DJ and SP 500. It was simply stunning but not quite convincing. How so? I tell you what intraday spikes that CAN be explained are lame. If we would have gotten this spike, on heavy volume, and there would have been NO news, I would be very bullish on the market. Instead, I still have the same apathy towards being long or short here as the market is coiling tighter and tighter showing very little conviction.
Obviously, as subscribers know being long some top gold, steel, and oil stocks, there are some hot sectors out there in this poor market. But besides these select few, along with the usual defensive, medical stocks, there is nothing else moving out of nice sound, round, properly formed bases. They are all choppy, too deep, or have been built with huge volume on the selloff and low volume on the rally. This is not bullish for the long term. But, it could be bullish on the short term. In fact the market is coiling, like I said, into a triangle pattern that I believe quite a few on RealMoney have also pointed out (I only read a few people and I was really busy today so I am not sure how many besides Helene mentioned it) and that obviously could be bullish or bearish.
However, since the pattern has a high history of continuing in the direction the pattern was formed, I would guess that this thing is going to break lower. That is confirmed to me by the lack of real leadership besides defensive stocks and the non-ability of the market to hold onto any kind of strong gains whatsoever. After any little strong rally, this market gets slapped lower and that is just not the way stocks act in bullish situations.
This is the kind of market that makes a lot of people very insecure and a lot of others ready to throw in the towel. This is why I have been saying over and over for the longest of time that cash is king. If I am not making money in this market, I doubt anyone else is either, because I have been around a VERY long time and have seen my returns in bad markets beat others before. This is relatively new but it is completely a function of the market. This has nothing to do with someones personal style or strategy. It is simply the market being very volatile and only rewarding the daytraders that buy the dips and sell the rips which is a style very few can use effectively.
In this market, NOTHING is for sure, and for all of you that read RealMoney and see the crap these kids are arguing about on Columnist Conversation (I think I am younger than 3/4 of them, sadly) a lot of people are not doing very well and I guess the next step is defending your style and insulting others. They have even pulled me into this game but I have always thought the "bottom-dippers" to be foolish. I remember in 1998 only a couple years after I started how I was already making comments to those buying new lows how stupid their strategy was. After studying that all the biggest stocks at one point or another had to make a new 52-week high for a first time, it became clear to me buying new highs on strong volume was the way to go. And early on after trying to bottom fish a few times and having those results PALE in comparison to going long QCOM and JDSU which were breaking out to new highs.
I remember being a subscriber to Townsend's RTIII and calling the trading desk once and getting a guy who asked me about my style. I told him I buy new highs and he told me he buys new lows. I immediately remember reading how most stocks went higher that hit new highs and visa verca for new lows. After that statement, he said, "good luck buying new highs, you are going to lose your money. If you ever want any advice my name is blah blah blah." As you can assume I never called that person again and I wonder how buying the new 52-week lows in 1998 was doing for him in 2000. And by the time 2002 came around I wonder if he was still around to "bottom-fish" the weakest stocks after so many assumed failed attempts.
I personally don't care what you use, I am simply showing you the style that will give you THE BIGGEST AND SAFEST RETURNS WITH A CONSISTENT AND PROPER WAY TO PREVENT MAJOR LOSSES IN YOUR PORTFOLIO. O'Neil has studied the best stocks of every year of every decade going back to 1945 (I think; if not, it is around there) and the exact same patterns showed up over and over. That is how he came up with CANSLIM. When we compare the CANSLIM records and then look at the early traders of Wyckoff, Baruch, and Livermore it becomes clear that the way they cut losses, bought breakout in the most expensive and highest quality stocks, and went to cash or went short in bear markets confirms that the best traders use a form of this system.
No matter what, though, I think common sense tells you that if you have a way to grab a 70,000% in CSCO and possibly get that in the future that you need to know how CSCO did that. What is funny to me is that all the TA and FA guys on RealMoney seem to be short term. There are some very long-term players there like Cramer and his picks. But when I go over his past records, I find very few 100% winners and do not find ANY 500% gainers. Yet by checking out 1999 and 2003 (BOTH INSANE BULL MARKETS; we will get another one soon) you can see that most of my best looking longs with strong fundamentals gave us MINIMUM 300% gains and some of the best did 1000% to 4000%. Why can't anyone grab these? It seems like I am the only one that has huge returns and the funny thing with that is that I combine fundamentals with technicals when it comes to buying and loading up on my longs.
I am not sure why they are so one way or the other. Like I have said before that would be like a doctor only using either X-ray's or instruments. The best doctors use both!
And when I use both, I know that fundamentals are ALWAYS the BEST at the top. Stocks top and selloff BEFORE the fundamentals do. Normally after some of history's biggest winners have topped, huge fundamentals roll in for a couple of quarters afterwards. It usually isn't until much later that the full problem is revealed.
But there is a macro way of checking on fundamentals and that is by a nations GDP. As the trend of a nation's GDP goes so goes its stock market. So if we look at the value of our Dollar, our debt, our GDP growth, jobless numbers, and CPI data it becomes very clear that the macro picture is very bearish. So when we have all of this, combined with a nasty GDP and downtrending stock market, I am not sure why people are so fancy on earnings right now. By next quarter, you will more-than-likely learn why so many stocks have topped and are now trending down.
This is why I don't EVER care why a market rallied or fell. I only care that it is. I can NOT make money by learning why it fell or rallied. I can only make money by acting on the upward and downward movement of the security based on unknown information. When you are long stocks in an uptrend and short stocks in a downtrend, it usually doesn't matter what the news is anyways. The strength of the trend if it is up will turn good and bad news into good. The same goes in a downtrend when bad news and good news will both be taken as bad.
Since 3 out of 4 stocks follow the general trend of the market and that trend is down, since the November top, the smartest thing it seems, in the intermediate term, is to focus on stocks that are rallying on low volume back to the 50 or 200 day moving average. When those past leaders get there, if they reverse on stronger volume, you know that you should be getting short these once beloved leaders.
One of those leaders that everyone talks about is DRYS. DRYS has a special spot in my heart thanks to a former-subscriber (I gave him the boot) from a couple to a few months back. WillPS back in December started to let me know how cheap DRYS had become and how it would be foolish to not buy it. The numbers were just too good and the stock was going to 100.
Obviously, during that time, I was no longer bullish on DRYS because my long that I initiated on 8/22/07 was completely sold (the last 10% of the holding) with a 10% gain on 11/26/07. However, from the purchase to the ultimate top the stock gained 106%. Thankfully, since I always! take some profit with a 100% gain, I was able to get some of that before it REVERSED ON HUGE VOLUME the very next day. The next morning is where most of DRYS was sold with a 74% gain. Not bad for a holding time of two months. 100% every two months the rest of your life leaves you a very wealthy man.
After the final sell on 11/26, I was done with DRYS as it sold off on some nasty volume, BOP went red, and the price pattern of the arithmetic chart appeared to me that the stock had possibly topped. But around 12/10 I start receiving messages telling me how great DRYS is. Long story short, DRYS then fell 35% finally breaking down below the 200 DMA which FOR ME is a CLEAR final sell signal for ANYONE who was long. If I would have bought DRYS off the November 2006 breakout, the close below the 200 DMA would have been my final sell signal (291% gain in one year and one month; NOT BAD AT ALL!!).
After going a little bit lower, DRYS finally started to bounce. Of course, by now, me and WillPS have parted ways as I know longer receive any of his pump emails but I am sure wherever he is, if he is still trading, he must be thinking I am a moron for not buying the lows (which he missed the first time, don't forget) as DRYS has now rallied 66% in one month and one week. Well I hope he doesn't forget about my 100% gain in two months as something doesn't tell me this is going to happen this time after ALL of that heavy volume selling. So even if it goes up a little more, the gains will still have paled in comparison the last time it rallied. But yes I congratulate you for this low to now gain of 66%. It is just too bad that the first time the "tip to buy" came to me it came with the stock 5% higher. So not sure how DRYS has changed the corner.
But I guess it has changed. Even if DRYS continues to rally, it is a VERY HIGH RISK candidate. First off, history has PROVEN (not guessing but the facts) to us that the best stocks only decline between 30% to 50% in the most severe bear markets. If this is a start of a bear market, DRYS has already failed the minimum base requirement to be a good stock as the stock was off more than 60% from the October 2006 highs to the January 2008 lows. The nastiness of the base is even made more clear by looking at a long term daily chart that goes back to when it IPO'd in 2005 on an arithmetic scale. This chart shows a stock that has rallied over 1000% from the lows in 2006 to the highs in 2007. I don't know about you but a 1000% gain in one year seems amazingly climatic to me. So I am not sure how my buddy is doing or what he is thinking by wanting to be long a stock in such a deep base, from such a heavy volume selloff, after a very heavy volume decline.
Now, I am now saying that it is not possible for DRYS to reset up in another base and then breakout to go on to produce some good gains. But history tells us that the past bull market leaders do not lead the next one. That is why INTC DELL MSFT CSCO ORCL YHOO EBAY did not rally 1000% the past bullish uptrend. Instead the 1000% gainers came from RIMM AAPL GRMN. So this just continues to prove that leaders from one year do not lead the next. So "if" DRYS can breakout from its next base and go on to score some wins I doubt that it would do as well as say AUY.
By looking at AUY you can see that its base is just now rounding out on a very long-term weekly pattern going back to 1997 when the stock started to selloff. So if AUY breaks and runs it has a MUCH HIGHER chance of being the next DRYS and putting in a 1000% run (NOT SAYING IT IS JUST SAYING THAT IF A STOCK IS GOING TO DO IT AUY COULD WITH ITS CHART AND AMAZING EPS AND SALES GROWTH). But the biggest difference from AUY to DRYS is the market. For AUY to do what DRYS did we would have to get a much more bullish tape than this. But ERS was a gold stock that rallied 550% in six months so AUY can be the next ERS instead. It doesn't matter to me, as long as it just goes up and makes me money.
Since I just brought up the bearish tape, before I end this weekend commentary, I want to discuss the internals, market sentiment, and then leave you with something from IBD and RevShark that confirms my analysis.
Some of the reasons why I just do not think the market is going to hold the 1/22 lows is that if we were going to do that we would be seeing some sort of real leadership. However, when you have ONLY 33 new 52-week highs to 281 new 52-week lows it is a clear warning that the market is very weak and that more stocks are reaching for lower lows than are reaching for higher highs. This is simply not what you see in bullish markets or in bear markets that are to turn from bad to good. Instead it is indicative of a market that is to give up the lows. But, for now we are still holding them so we can't start pounding the table and screaming to short the market just yet. But this internal is very weak.
Not only are the total numbers of new highs to lows poor, the quality of the new highs is worse. Steel-Producers, Banks-Foreign, Household Furniture, Energy-Other, Medical-Systems/Equip, Metal Proc & Fab, Apparel-Clothing, Gold, Nat Gas, Chemicals, Tobacco, Pollution Control, Oil&Gas, and Consumer Discretionary. Do you see Telecom, Aerospace, Internet, Software, Hardware, Semiconductor, Computers, Real Estate, or Brokerage Firms up there? Nope. You have inflation sensitive and defensive stocks ONLY and every single bit of the high tech sector (minus Energy-Other) and the brokerage firms are selling off.
Obviously, the best stocks are the innovative, fresh, high-growth businesses that come from technology. But the brokerage stocks like ETFC SWIM TRAD AMTD (IBKR bucking the trend showing you the real leader) show you the confidence the public has in the stock market and when these stocks are rising the market is usually bullish as the stocks would not be going higher unless things were great back at home. So obviously things are not COMPLETELY healthy.
The last thing that bugs me is sentiment. I still hear value investors and bottom-callers claim the market has bottomed, left and right. But I have been around a long time and my memory is very sharp when it comes to the stock market because I love it so much (the stock market and IBD has literally SAVED MY LIFE). Not only that, I have studied every major turn from 1890 to now. So the 1907, 1929....2000 market is all known by me. I know about the follow-through days that led to the bottoms, I know about the way they topped, and I know the stocks that came with the uptrends or downtrends via reading books. Thank you John Boik! (If you do not have any of his books, buy them all!!). But the point is that at every bottom, two things happen: there is either a very PAINFUL intraday selloff that creates SO MUCH fear that volume spikes to astronomical levels and we bottom after a big price swing (usually 5% or more) or we slowly selloff, moving lower inch-by-inch lower on sometimes heavier volume but mostly lighter volume. That is not fear that is frustration and has usually made the best bottoms.
That kind of frustration low is how the 2002 lows were made which led to the powerful follow-through days in March 2003 that launched one of the best bull markets that my charts have ever seen. But the 1999 bull market was launched from a "fear bottom" on 10/8/98 (I remember it like it was yesterday). But just like the returns are proving, the 1999 bull gave me a LOT more HUGE gains in short time but in 2003 there were a lot more great chart patterns that led to some huge gains in much longer time frames. Which is better because some of these sales came with long-term capital gains taxes. So, to me, a slow bleeding death of the stock market lasting between 6-24 months is the best thing for the market. That will ensure use more NTES SINA SOHU FMDAY TASR FLML USNA SWIR SIGM EVOL charts for us when this is over.
And trust me, we are still not over this bearish market yet. Not with the VIX moving below the 50 day moving average again to the 24 level (need 40 at least), the put/call at 1.16 (need 1.5 at least), and bulls still beating the bears in the investors intelligence 41% to 33% (they almost crossed last week--36% to 35%--but they still didn't cross; last time was in Oct 2005).
With leadership and sentiment like this, I hope you are smart and making sure you keep A LOT of cash on hand. Wait for a more clear pattern to emerge first. If the market breaks down and starts making new lows, get ready to short those stocks that rallied on low volume to key moving averages. If we get a follow-through day, wait till you see stock charts like the chart patterns I have been posting in my 'past big winners' section. YOU MUST LEARN FROM THE PAST (GOING BACK AS FAR AS YOU CAN), TO LEARN EVERYTHING ABOUT THE FUTURE. Or at least learning everything you need to know what to do in the future.
I hope you all have a wonderful weekend! Aloha from the beautiful island of Maui!! I will see you in the chat room either on Sunday for a little bit or on Monday at 7am HST (9am PST 12pm EST)!!
top holdings up this week and their returns: MA 318% IHS 227% CPHD 105% MCF 124% CCC 120% AUXL 87% PTEC 121% EBIX 114% (AAPL 33% MSTR 29% ASF 30% TIF 20% EPIQ 22% EEFT 20% COH 28% SHOO 34% SGMS 38% PVH 23% GRMN 32% PSYS 23% GOOG 22% LFC 34% LVS 23% CBEY 50%)
Saturday, February 23, 2008
Sunday, February 17, 2008
Stocks Sell Off And Then Come Back Before The Closing Bell Ending Mixed On An Overall Very Dull Friday; Enjoy Your Long Weekend
Stocks started the day pretty much where they ended on Thursday but shortly after the open Ben Bernanke (the most CLUELESS fed head ever) talked more about the economic weakness, citing the troubled housing and job markets, ailing bond insurers and a broader credit crunch. This helped stocks erase all of the gains produced by the follow-through day (FTD) in just one and a half sessions. This is not how great rallies start.
However, after taking out the gains of the FTD for good, stock indexes found a floor and rallied the rest of the day with the SP 500 turning green and closing at the HOD. The turn was bullish intraday but if you look on your daily charts you can see that today's trading range was not that large and the turn wasn't as bullish as the very short term intraday charts make it look. Volume was also just 5% higher on the NYSE while 11% lower on the Nasdaq showing that the intraday turn did not have a lot of conviction behind it. Thus it remained just another one of those bear market bounces. I like these at it ensures the market doesn't get too oversold too fast.
Today's intraday selloff also proved that those that were too quick to think that the FTD was the real deal that they need to be patient and let this market play out a bit more before calling for an ultimate bottom. The longer this selloff last, the better the longs are going to do (since they will build longer and stronger bases) when they do complete and breakout of their next base. Right now, without any nice looking charts out there, because of the massive selloff on heavy volume from the November top, it is going to take a long time for them to setup. The fact that I can't find much out there in terms of stocks building solid bases means that we probably have a while to go in this pullback. This is not a bad, this is a good thing. It would not be healthy to rally here without new leaders.
Without new leaders, those old leaders would guarantee us lame returns as the VIX is just too low here to produce any new longs that are going to produce us huge gains. Volatility is a direct correlation to returns. The higher the volatility, the larger the gains stocks are going to produce as fear rises and more and more people sell stocks and shorts stocks thus allowing a vicious and powerful rally with a lot of short covering. The VIX at 25 is 50% lower than where I like it to be for a strong bottom. A VIX at 50, followed by an FTD with a lot of stocks breaking out of bases leads to great bull markets. Not what we see here.
With this lack of fear it seems hard to be at a bottom. There are so many other points that just indicate to me we can't be at a bottom. The fact that we see no new innovative technology related industry groups moving up the list and instead see all the old leaders in commodities and the new leaders in your bear market favorites (medical, pollution, insurance, and consumer non-durables). Thus with these old leaders and new defensive names climbing up the charts it is hard to think that a fresh brand new bull market is going to start from these levels after only three months of correcting a big five years worth of gains.
That point is just about as clear as any other point I can make to people that the market is probably not ready to fly higher from here. I don't know who those people are that think we can have a brand new rally that takes us to new highs here, after our first real correction, after five years of gains. This is not a normal pullback in a long uptrend. We had those already. We had one each year in 2004, 2005, 2006, and then in 2007 there were two severe pre-top selloffs that were the final two pullbacks that tricked the public into the market. It only took the public four years to see through the BS on CNN and the lies from ABC, NBC, and CBS. Once they saw through the lies and realized things were not nearly as bad as everyone said things were, they started coming back into the market.
Of course, when they came back in, just like in 2000 when they flocked to JDSU, SDLI, MSTR, QCOM, CSCO, and ORCL, they came into the stocks up the most and talked about the most AAPL, RIMM, BIDU, GOOG, and the solar stocks. So now that they missed the biggest move and showed up that was the first warning that things couldn't last much longer. Now that we have topped from November, all of these stocks have sold off on huge volume. But since these new market amateurs can not read charts, they think that they are entering a market that is giving them a perfect chance to buy bargain stocks.
What is amazing about this is that these people will not even do the basic research that would show you that if you have a bunch of stocks up over 1000% and people ignore it and then after a big selloff all of a sudden people recognize these 1000% plus winning stocks you always have a top. This has never not been this way. Tulip bubble, South Seas bubble, 1907, 1929, 1937...1968-1982 (nifty fifty), 1987, 1998, 2000-2002, now. The stocks that are loved AFTER huge runs that then get the public attention never come back. GOOG, RIMM, BIDU, AAPL are your next MSFT, DELL, CSCO, ORCL of 2000. It is never different. It was a bubble then, it is a different kind of bubble now. Stocks may not be expensive now, but they will be if the economy continues to weaken.
If you have been following the macro picture of the US, you know that things are not going well out there. The NY Empire State index-the regional manufacturing report showed a surprise reading of -11.7, well below forecasts for a positive reading of 7. This along with everything else we see everyday on this front show that things are not good. If you are not familiar with the market then you might not know that as the trend of a countries interest rates and GDP go so goes its market. The Fed is clearly telling us "the economy is in trouble" by lowering rates. The GDP has been contracting, while the CPI and PPI flies and things just do not look good overall. As goes a countries economy there goes its market.
Once you start seeing a couple quarters of growth in GDP, along with the bad numbers in the rest of the macro data get better, you can be sure a bottom might be somewhere around. If that comes with some high level of fear with some nice charts showing up everywhere that would be even better. But until the housing woes abate, the GDP levels off, the CPI,PPI stop flying, wages start rising, gold tops, the dollar stabalizes and rallies, and we get some great stocks setting up in some HOT green bases, there will be nothing we can do about this selloff. We just have to wait till it runs its course.
While we do that, like I have been saying for those that are experienced, we have some great opportunities to short a lot of stocks that have trends changing from 5 years up to down and that are selling off on heavy volume. If they can give us great entries, we will short them and try to make some money in this rough market while we wait for that real bottom when real leaders will show up and produce real gains. Not these stocks that have been beaten up and that have been left bloody and bruised. Leave the homebuilders, retail, banks, and mortgage stocks to Cramer's crew. The winners and leaders don't need to mess with these trades. Let the lazy and foolish trade these stocks--I can call them foolish because everyone has heard of CANSLIM and IBD. If you have read the history of CANSLIM's performance and still trade off of Cramer, there is something really wrong with you. It is called laziness and it is possible you are wearing a big pair of blinders.
Cramer still thinks we have bottomed. Well how come we sold off from the 2000 top (where new lows started beating new highs; just like we had in 2007) all the way to July 2002 with new lows always beating new highs and never bottomed then? Because, according to Cramer, we can bottom now, even though on Friday there were only 20 new highs to 200 new lows on a day when the SP 500 closed higher. Once new highs started to beat new lows again in the list right before October 2002 bottom did the selloff stop. By the time March 2003 came around not only were there 100 more new highs than lows, there was no distribution in the markets at all as the Acc/Dis ratings were between A and B on all the indexes (some of my facts might be SLIGHTLY off as I have no records of this and am going strictly by memory of what happened four plus years ago). Where are our Acc/Dis ratings? C to D, on all the indexes. This is NOTHING like the October 2002 lows and the real bottom on March 2003. This looks to me JUST LIKE April 2000-August/September 2000.
Back then, just like now, EVERYONE was for sure the bottom was in as SO MANY new traders came along after the late 1999 rally started to produce a ton of stocks that ran hundreds to thousands of percent. These new traders had no clue how to read price and volume patterns in the indexes and when the market topped almost NO ONE believed it. Just like now, as then, everyone was for sure this was our first real deep pullback that would allow us to buy stocks at prices we have not seen in a long time. Well it sure did offer people prices they never saw again. Too bad it came as the stocks continued to selloff and left most people broke or darn close near it. That knocked so many people out of the game that they could not even enjoy the real bottom in October 2002 once it finally came.
Their inability to read charts came as a direct correlation of getting involved in a game they had no chance of ever succeeding in. If you trade or invest in the stock market for fun and want to learn how to make the big money for the challenge of it, there is a VERY HIGH chance you will succeed. If you get involved in the stock market to get rich ONLY, you get no enjoyment looking at stocks like FFH, and you have no interest in learning how this works, I guarantee 100% you will fail. This game is not for those that want to get filthy rich quick. The stock market is a great investment tool for those that work their butt off. If you want to make passive money and not work hard, buy a great mutual fund like CGM Focus with Ken Heebner. If you want to get filthy rich, you will need to grab a passion for the stock market. You will want to get a passion for owning hot max green BOP filled charts like EPIC in 2003. When I see charts like that all I can think about is loading up all of my available money in them for the potential gains. Loving those charts and knowing that when they work they WORK REALLY well allows me to dive in to them since I love those charts. Taking the time learning to be patient and waiting for these to show up is how you get rich. You can't jump into this market right now and get rich. These charts don't exist.
But as each day goes by I know that we get closer and closer to the moment when I will have my max green BOP, cup w/ handle pattern with perfect price and volume chart setup in a stock with great fundamentals. When they show up, I will be 400% long and will be reaping the rewards of the next SINA and SOHU. I just wonder how many will be with me when that time comes. I know that if you are in this game looking to get rich now, you will not be around when it is time to get rich. However, if you are here to learn as much as you can and to refine your eyes to the point that when you see the next perfect chart you will act and go heavily long then you are on the right path. This is no different than becoming a doctor or lawyer. It takes time to learn and it takes time waiting for those perfect moments that come very few times every ten years.
Right now, obviously, we are not at one of those moments and I believe that most traders continue to do themselves a HUGE service by remaining heavy in cash. Those that have made money on the long side and feel comfortable shorting should not be afraid to go ahead and wait for those perfect moments to get short the past big leaders of the last bull market. Just make sure you do not chase. A lot of people chased the past big leaders that I went short and ended up suffering some pain. Make sure you only short after low volume rallies that fail right at key resistance. Do not short stocks that first selloff on light volume, then rally on huge volume to resistance. If that happens you do not short the stock. If you don't know how to tell low volume from high volume, you definitely should not be shorting.
I am not sure if it is smart to start a heavy short here but I am carrying 55% of my account short (most from much higher levels) based off the charts. Not only do the new shorts now offer me excellent short sales points with little risk but the charts are so red that the ones that are working are working very well. However, once again, just like in 2007, I am having trouble loading up on the right shorts. The shorts I want to load up on are not breaking hard and the ones I am just playing with that have weaker short sale patterns are cracking wide open. I just had this bad luck on the long side in the second half of 2007 and if the chemical stocks do not crack here the bad luck will continue. At least my big-cap tech stocks are working out (minus my FSLR loss) but I am not nearly as short as I wanted to be.
However, I guess I have to wait for those stocks to bounce higher on lower volume because right now they are down too much and need to spend a lot more time going sideways before breaking back down again on higher volume. If I can get a perfect reversal at any key resistance/moving average on heavier volume that will be where I will continue my short operation on these stocks. But until we completely give it up, I guess I will be focusing on some shorts and some of those longs that have less than stellar chart patterns.
I know it seems like I keep going over the same points each day but some of you might not understand how important this is. I am beating this into your heads to convince you that you might want to stop thinking that you are going to find another AFSI/TESO any time soon. Those that were with me during TESO/AFSI know that when they are perfect I let you know and when they work we celebrate on those stocks. However, folks, I just don't think we will be doing any celebrating any time soon. After TESO/AFSI we spent time being disappointed via SNDA INXI BYI BLL ESEA. Considering that in 2003 every single one worked, in 2004 80% worked, in 2005 60% worked, in 2006 40% worked, and in 2007 20% worked, you can do the math now and see how many are "probably" going to work in 2008. None. So I doubt we are going to get a SINA SOHU (2003) or much less an AFSI (2007) here.
Investors Business Daily is confirming exactly what I see.
Here is what IBD's Big Picture has to say about the current quality of the charts:
For growth investors, the most pressing concern is the lack of institutional-quality, leading stocks breaking out of well-formed price bases. A healthy market uptrend should yield copious breakouts for top stocks. If it doesn't, there's nothing to buy, and little reason to put your capital at risk.
Given all these variables, investors are best off exercising patience and prudence. Let both the broad market and leading stocks prove themselves before you start buying.
Even if you do buy, proceed with discipline. Start by purchasing partial positions in just one or two stocks. Make sure those stocks are working before adding to your positions and looking for more stocks.
Leading stocks offered more mixed tidings. Priceline.com (PCLN) reported Q4 earnings that topped views. The discount travel site's stock soared 21% in massive volume. Priceline surged to a new high, clearing a short, six-week pattern with a faulty handle.
That's been another issue facing growth investors lately: Of the few stocks that have broken out, many have emerged from sloppy price patterns, lacking many of the traits normally found in a healthy breakout.
In a shaky market, it's doubly important that you demand both technical and fundamental strength from any stock you purchase.
Here is what the IBD Your Weekly Review had to say:
Although a couple of charts in Your Weekly Review are highlighted with heavy borders, it’s still a good time to go slow in buying stocks and let the fledgling rally prove itself.
One of the most important indicators of the market is the quality of the stocks leading it. Despite Wednesday’s market follow-
through, it’s still hard to see where the new rally’s leadership is coming from.
The top groups today are basically the same as in the last rally. The main difference is that this time around there are some medical stocks thrown in the mix.
Still, a few institutional-quality stocks are forming proper bases. Two of them bear the heavy border that signals leading stocks in bases or near proper buy points.
And then this is what the writeup for the IBD 100 had to say:
Last week's follow-through may have marked a bullish turn in the market, but that doesn't mean investors should be in a hurry to buy stocks.
Why? There just aren't many compelling candidates. A strong new rally typically yields a rash of breakouts by new leaders within a few weeks of the follow-through rally confirmation.
This week's IBD 100 is comprised of few new names, especially those with superior fundamentals. That indicates a lack of sector rotation, or emerging leadership.
Meanwhile, much of the market's old guard is still deep in corrections.
Some of their basing patterns show flaws. So even if they look more promising as they build the right side, you need to make sure the stock meets all your fundamental and technical criteria.
Considering that some of our best longs recently SPW, ILMN, CPHD, CMED, CREE, BVN, ATEC, CMP, URBN, MTL, CHDX, NEU, and PRXL are still doing very well, I guess I can take pleasure in knowing that I am in the best of the best in a rough market. When I look at this list and compare the stock charts compared to Cramer's holdings, I get a HUGE grin on my face. I just love stocks like CMP in overall market environments like this. It feels good knowing that I completely control my destiny, have the ability to pick the best stocks to be long in this rough market, and can preserve all of my capital so that when this poor market environment is over I can transfer all of my cash, longs, and shorts into the next SINA, SOHU, TASR, EPIC, EVOL, SIGM, NTES, SSYS, GRMN, FMDAY. My goal, in the next bull market (like 1999 and 2003) is to return 1000%. If you look at the max green BOP filled chart patterns then that broke out on huge volume back in those two years, you will see the charts I like made you rich. It will happen again and I will find and be long the next TASR.
I love the stock market and that is why when this trash of a chop and flop market is over, you will all be rewarded: I NEVER GIVE UP, NO MATTER HOW UGLY THE MARKET GETS!! THERE IS NO QUIT IN ME. I HOPE THEIR IS NO QUIT IN YOU. IF I HAVE FAITH IN YOU, YOU SHOULD HAVE FAITH IN YOURSELF. LET'S GO GET 'EM! SURFS UP!!!!!
top longs (shorts) holdings: AUXL 105% MCF 116% IHS 227% RICK 120% PTEC 107% CCC 116% MA 314% (HBC 23% SHOO 38% ING 31% THOR 21% FTEK 31% MI 23% CLP 29% HIG 20% PRU 27% AAPL 30%)
However, after taking out the gains of the FTD for good, stock indexes found a floor and rallied the rest of the day with the SP 500 turning green and closing at the HOD. The turn was bullish intraday but if you look on your daily charts you can see that today's trading range was not that large and the turn wasn't as bullish as the very short term intraday charts make it look. Volume was also just 5% higher on the NYSE while 11% lower on the Nasdaq showing that the intraday turn did not have a lot of conviction behind it. Thus it remained just another one of those bear market bounces. I like these at it ensures the market doesn't get too oversold too fast.
Today's intraday selloff also proved that those that were too quick to think that the FTD was the real deal that they need to be patient and let this market play out a bit more before calling for an ultimate bottom. The longer this selloff last, the better the longs are going to do (since they will build longer and stronger bases) when they do complete and breakout of their next base. Right now, without any nice looking charts out there, because of the massive selloff on heavy volume from the November top, it is going to take a long time for them to setup. The fact that I can't find much out there in terms of stocks building solid bases means that we probably have a while to go in this pullback. This is not a bad, this is a good thing. It would not be healthy to rally here without new leaders.
Without new leaders, those old leaders would guarantee us lame returns as the VIX is just too low here to produce any new longs that are going to produce us huge gains. Volatility is a direct correlation to returns. The higher the volatility, the larger the gains stocks are going to produce as fear rises and more and more people sell stocks and shorts stocks thus allowing a vicious and powerful rally with a lot of short covering. The VIX at 25 is 50% lower than where I like it to be for a strong bottom. A VIX at 50, followed by an FTD with a lot of stocks breaking out of bases leads to great bull markets. Not what we see here.
With this lack of fear it seems hard to be at a bottom. There are so many other points that just indicate to me we can't be at a bottom. The fact that we see no new innovative technology related industry groups moving up the list and instead see all the old leaders in commodities and the new leaders in your bear market favorites (medical, pollution, insurance, and consumer non-durables). Thus with these old leaders and new defensive names climbing up the charts it is hard to think that a fresh brand new bull market is going to start from these levels after only three months of correcting a big five years worth of gains.
That point is just about as clear as any other point I can make to people that the market is probably not ready to fly higher from here. I don't know who those people are that think we can have a brand new rally that takes us to new highs here, after our first real correction, after five years of gains. This is not a normal pullback in a long uptrend. We had those already. We had one each year in 2004, 2005, 2006, and then in 2007 there were two severe pre-top selloffs that were the final two pullbacks that tricked the public into the market. It only took the public four years to see through the BS on CNN and the lies from ABC, NBC, and CBS. Once they saw through the lies and realized things were not nearly as bad as everyone said things were, they started coming back into the market.
Of course, when they came back in, just like in 2000 when they flocked to JDSU, SDLI, MSTR, QCOM, CSCO, and ORCL, they came into the stocks up the most and talked about the most AAPL, RIMM, BIDU, GOOG, and the solar stocks. So now that they missed the biggest move and showed up that was the first warning that things couldn't last much longer. Now that we have topped from November, all of these stocks have sold off on huge volume. But since these new market amateurs can not read charts, they think that they are entering a market that is giving them a perfect chance to buy bargain stocks.
What is amazing about this is that these people will not even do the basic research that would show you that if you have a bunch of stocks up over 1000% and people ignore it and then after a big selloff all of a sudden people recognize these 1000% plus winning stocks you always have a top. This has never not been this way. Tulip bubble, South Seas bubble, 1907, 1929, 1937...1968-1982 (nifty fifty), 1987, 1998, 2000-2002, now. The stocks that are loved AFTER huge runs that then get the public attention never come back. GOOG, RIMM, BIDU, AAPL are your next MSFT, DELL, CSCO, ORCL of 2000. It is never different. It was a bubble then, it is a different kind of bubble now. Stocks may not be expensive now, but they will be if the economy continues to weaken.
If you have been following the macro picture of the US, you know that things are not going well out there. The NY Empire State index-the regional manufacturing report showed a surprise reading of -11.7, well below forecasts for a positive reading of 7. This along with everything else we see everyday on this front show that things are not good. If you are not familiar with the market then you might not know that as the trend of a countries interest rates and GDP go so goes its market. The Fed is clearly telling us "the economy is in trouble" by lowering rates. The GDP has been contracting, while the CPI and PPI flies and things just do not look good overall. As goes a countries economy there goes its market.
Once you start seeing a couple quarters of growth in GDP, along with the bad numbers in the rest of the macro data get better, you can be sure a bottom might be somewhere around. If that comes with some high level of fear with some nice charts showing up everywhere that would be even better. But until the housing woes abate, the GDP levels off, the CPI,PPI stop flying, wages start rising, gold tops, the dollar stabalizes and rallies, and we get some great stocks setting up in some HOT green bases, there will be nothing we can do about this selloff. We just have to wait till it runs its course.
While we do that, like I have been saying for those that are experienced, we have some great opportunities to short a lot of stocks that have trends changing from 5 years up to down and that are selling off on heavy volume. If they can give us great entries, we will short them and try to make some money in this rough market while we wait for that real bottom when real leaders will show up and produce real gains. Not these stocks that have been beaten up and that have been left bloody and bruised. Leave the homebuilders, retail, banks, and mortgage stocks to Cramer's crew. The winners and leaders don't need to mess with these trades. Let the lazy and foolish trade these stocks--I can call them foolish because everyone has heard of CANSLIM and IBD. If you have read the history of CANSLIM's performance and still trade off of Cramer, there is something really wrong with you. It is called laziness and it is possible you are wearing a big pair of blinders.
Cramer still thinks we have bottomed. Well how come we sold off from the 2000 top (where new lows started beating new highs; just like we had in 2007) all the way to July 2002 with new lows always beating new highs and never bottomed then? Because, according to Cramer, we can bottom now, even though on Friday there were only 20 new highs to 200 new lows on a day when the SP 500 closed higher. Once new highs started to beat new lows again in the list right before October 2002 bottom did the selloff stop. By the time March 2003 came around not only were there 100 more new highs than lows, there was no distribution in the markets at all as the Acc/Dis ratings were between A and B on all the indexes (some of my facts might be SLIGHTLY off as I have no records of this and am going strictly by memory of what happened four plus years ago). Where are our Acc/Dis ratings? C to D, on all the indexes. This is NOTHING like the October 2002 lows and the real bottom on March 2003. This looks to me JUST LIKE April 2000-August/September 2000.
Back then, just like now, EVERYONE was for sure the bottom was in as SO MANY new traders came along after the late 1999 rally started to produce a ton of stocks that ran hundreds to thousands of percent. These new traders had no clue how to read price and volume patterns in the indexes and when the market topped almost NO ONE believed it. Just like now, as then, everyone was for sure this was our first real deep pullback that would allow us to buy stocks at prices we have not seen in a long time. Well it sure did offer people prices they never saw again. Too bad it came as the stocks continued to selloff and left most people broke or darn close near it. That knocked so many people out of the game that they could not even enjoy the real bottom in October 2002 once it finally came.
Their inability to read charts came as a direct correlation of getting involved in a game they had no chance of ever succeeding in. If you trade or invest in the stock market for fun and want to learn how to make the big money for the challenge of it, there is a VERY HIGH chance you will succeed. If you get involved in the stock market to get rich ONLY, you get no enjoyment looking at stocks like FFH, and you have no interest in learning how this works, I guarantee 100% you will fail. This game is not for those that want to get filthy rich quick. The stock market is a great investment tool for those that work their butt off. If you want to make passive money and not work hard, buy a great mutual fund like CGM Focus with Ken Heebner. If you want to get filthy rich, you will need to grab a passion for the stock market. You will want to get a passion for owning hot max green BOP filled charts like EPIC in 2003. When I see charts like that all I can think about is loading up all of my available money in them for the potential gains. Loving those charts and knowing that when they work they WORK REALLY well allows me to dive in to them since I love those charts. Taking the time learning to be patient and waiting for these to show up is how you get rich. You can't jump into this market right now and get rich. These charts don't exist.
But as each day goes by I know that we get closer and closer to the moment when I will have my max green BOP, cup w/ handle pattern with perfect price and volume chart setup in a stock with great fundamentals. When they show up, I will be 400% long and will be reaping the rewards of the next SINA and SOHU. I just wonder how many will be with me when that time comes. I know that if you are in this game looking to get rich now, you will not be around when it is time to get rich. However, if you are here to learn as much as you can and to refine your eyes to the point that when you see the next perfect chart you will act and go heavily long then you are on the right path. This is no different than becoming a doctor or lawyer. It takes time to learn and it takes time waiting for those perfect moments that come very few times every ten years.
Right now, obviously, we are not at one of those moments and I believe that most traders continue to do themselves a HUGE service by remaining heavy in cash. Those that have made money on the long side and feel comfortable shorting should not be afraid to go ahead and wait for those perfect moments to get short the past big leaders of the last bull market. Just make sure you do not chase. A lot of people chased the past big leaders that I went short and ended up suffering some pain. Make sure you only short after low volume rallies that fail right at key resistance. Do not short stocks that first selloff on light volume, then rally on huge volume to resistance. If that happens you do not short the stock. If you don't know how to tell low volume from high volume, you definitely should not be shorting.
I am not sure if it is smart to start a heavy short here but I am carrying 55% of my account short (most from much higher levels) based off the charts. Not only do the new shorts now offer me excellent short sales points with little risk but the charts are so red that the ones that are working are working very well. However, once again, just like in 2007, I am having trouble loading up on the right shorts. The shorts I want to load up on are not breaking hard and the ones I am just playing with that have weaker short sale patterns are cracking wide open. I just had this bad luck on the long side in the second half of 2007 and if the chemical stocks do not crack here the bad luck will continue. At least my big-cap tech stocks are working out (minus my FSLR loss) but I am not nearly as short as I wanted to be.
However, I guess I have to wait for those stocks to bounce higher on lower volume because right now they are down too much and need to spend a lot more time going sideways before breaking back down again on higher volume. If I can get a perfect reversal at any key resistance/moving average on heavier volume that will be where I will continue my short operation on these stocks. But until we completely give it up, I guess I will be focusing on some shorts and some of those longs that have less than stellar chart patterns.
I know it seems like I keep going over the same points each day but some of you might not understand how important this is. I am beating this into your heads to convince you that you might want to stop thinking that you are going to find another AFSI/TESO any time soon. Those that were with me during TESO/AFSI know that when they are perfect I let you know and when they work we celebrate on those stocks. However, folks, I just don't think we will be doing any celebrating any time soon. After TESO/AFSI we spent time being disappointed via SNDA INXI BYI BLL ESEA. Considering that in 2003 every single one worked, in 2004 80% worked, in 2005 60% worked, in 2006 40% worked, and in 2007 20% worked, you can do the math now and see how many are "probably" going to work in 2008. None. So I doubt we are going to get a SINA SOHU (2003) or much less an AFSI (2007) here.
Investors Business Daily is confirming exactly what I see.
Here is what IBD's Big Picture has to say about the current quality of the charts:
For growth investors, the most pressing concern is the lack of institutional-quality, leading stocks breaking out of well-formed price bases. A healthy market uptrend should yield copious breakouts for top stocks. If it doesn't, there's nothing to buy, and little reason to put your capital at risk.
Given all these variables, investors are best off exercising patience and prudence. Let both the broad market and leading stocks prove themselves before you start buying.
Even if you do buy, proceed with discipline. Start by purchasing partial positions in just one or two stocks. Make sure those stocks are working before adding to your positions and looking for more stocks.
Leading stocks offered more mixed tidings. Priceline.com (PCLN) reported Q4 earnings that topped views. The discount travel site's stock soared 21% in massive volume. Priceline surged to a new high, clearing a short, six-week pattern with a faulty handle.
That's been another issue facing growth investors lately: Of the few stocks that have broken out, many have emerged from sloppy price patterns, lacking many of the traits normally found in a healthy breakout.
In a shaky market, it's doubly important that you demand both technical and fundamental strength from any stock you purchase.
Here is what the IBD Your Weekly Review had to say:
Although a couple of charts in Your Weekly Review are highlighted with heavy borders, it’s still a good time to go slow in buying stocks and let the fledgling rally prove itself.
One of the most important indicators of the market is the quality of the stocks leading it. Despite Wednesday’s market follow-
through, it’s still hard to see where the new rally’s leadership is coming from.
The top groups today are basically the same as in the last rally. The main difference is that this time around there are some medical stocks thrown in the mix.
Still, a few institutional-quality stocks are forming proper bases. Two of them bear the heavy border that signals leading stocks in bases or near proper buy points.
And then this is what the writeup for the IBD 100 had to say:
Last week's follow-through may have marked a bullish turn in the market, but that doesn't mean investors should be in a hurry to buy stocks.
Why? There just aren't many compelling candidates. A strong new rally typically yields a rash of breakouts by new leaders within a few weeks of the follow-through rally confirmation.
This week's IBD 100 is comprised of few new names, especially those with superior fundamentals. That indicates a lack of sector rotation, or emerging leadership.
Meanwhile, much of the market's old guard is still deep in corrections.
Some of their basing patterns show flaws. So even if they look more promising as they build the right side, you need to make sure the stock meets all your fundamental and technical criteria.
Considering that some of our best longs recently SPW, ILMN, CPHD, CMED, CREE, BVN, ATEC, CMP, URBN, MTL, CHDX, NEU, and PRXL are still doing very well, I guess I can take pleasure in knowing that I am in the best of the best in a rough market. When I look at this list and compare the stock charts compared to Cramer's holdings, I get a HUGE grin on my face. I just love stocks like CMP in overall market environments like this. It feels good knowing that I completely control my destiny, have the ability to pick the best stocks to be long in this rough market, and can preserve all of my capital so that when this poor market environment is over I can transfer all of my cash, longs, and shorts into the next SINA, SOHU, TASR, EPIC, EVOL, SIGM, NTES, SSYS, GRMN, FMDAY. My goal, in the next bull market (like 1999 and 2003) is to return 1000%. If you look at the max green BOP filled chart patterns then that broke out on huge volume back in those two years, you will see the charts I like made you rich. It will happen again and I will find and be long the next TASR.
I love the stock market and that is why when this trash of a chop and flop market is over, you will all be rewarded: I NEVER GIVE UP, NO MATTER HOW UGLY THE MARKET GETS!! THERE IS NO QUIT IN ME. I HOPE THEIR IS NO QUIT IN YOU. IF I HAVE FAITH IN YOU, YOU SHOULD HAVE FAITH IN YOURSELF. LET'S GO GET 'EM! SURFS UP!!!!!
top longs (shorts) holdings: AUXL 105% MCF 116% IHS 227% RICK 120% PTEC 107% CCC 116% MA 314% (HBC 23% SHOO 38% ING 31% THOR 21% FTEK 31% MI 23% CLP 29% HIG 20% PRU 27% AAPL 30%)
Saturday, February 09, 2008
After A Rough Week For Stocks, Bottom Callers Remind Us How Stupid We Must Be; Stocks End Mixed On Lower Volume
What appeared to be a strong start on Friday turned out to be a big disappointment for the perpetual-bottom callers as stocks closed mixed with volume falling across the board ahead of the weekend. The dull action had to be a bit of a disappointment for all of the people who have been emailing me the past month telling me how stupid all of us trend followers are. Add to that list the crew of Cramer and Marcin and you have a ton of people that have a lot riding on this being the lows.
The best part about all of that is that no matter how wrong I ever am the great thing about this methodology is that we cut our losses when we are wrong. When you go long stocks that move up and go short stocks that move down, it is easy to know when you are wrong. That is whenever you lose money. If you lose money, you are wrong. However, in the world of value, as you lose money, it is supposedly (if you have done your "research") a better buy. So while it is great that your stock rises, it is "almost" (I am being a bit over the top but you should be able to understand that) better that a stock fall as you can now buy it at a cheaper price.
My biggest problem with this is that what happens once you get in a stock like Enron, Refco, Worldcom, Adelphia, or any other stock that has gone to zero? They tell you that you are supposed to only buy real quality stocks. OK, so let's go back to 2000 when a TON of values were created by EBAY YHOO CSCO ORCL DELL INTC JDSU QCOM. Do a me a favor and go back and check out how well those stocks have done since the 2000 highs. And make sure you use the highs. Because, just like RIGHT NOW, they were bullish and great values IMMEDIATELY when they started to selloff. So it isn't like they called them values after a 50% fall. They were values the whole way down. Just like our past leaders will be.
So please--I know this is an odd way to start this commentary off but I have to--do not start to look into buying GOOG RIMM AAPL BIDU. The chances that these values can create you real wealth in the future, after such a huge run, is very small. History clearly tells us that past big winners are never big winners again. Well not all but 90-95% of past big winners. Do you see QCOM and JDSU making the gains they did from 1998-2000 when they both returned 3000%. What is sad is that I had both of these longs but value guys scared me out of both in early 1999. Not only do value guys buy on the way down but they almost ALWAYS sell too early. Just be careful of all of these guys. Even if the market rallies a bit from here, if it is on lower volume and the charts are still sloppy, it will fail.
What we need to have before I can get excited about any market low is two things: 1. A real follow-through day on a huge price and volume gain with a lot of high quality stocks breaking out. 2. real fear seen by a VIX over 35 (MINIMUM!), put/call over 1.5, and the investors intelligence survey showing more bears than bulls. The survey hasn't pulled that off since the 2005 lows where a very smart money manager was telling me the market was done and that a bear market was starting. Guess what he is now? If you said a bull, you are correct. Guess how many years he has been doing this? Over 40. How can you go 40 years in this business without ever realizing CANSLIM is the best-of-the-best. I'll tell you how: ego.
Your ego can crush you in this game. What are the bottom callers going to do or say if we break to new lows? Will they say I was wrong? Will they say RevShark and Steven Smith were wrong? Is the stock market wrong? And that is the biggest problem with value guys. If we are in fact starting a bad bear market (obviously we have) every new low will be a new place to buy for them and every new low will be one step closer for us to go broke if we trade like that.
When you have billions, you can add hundreds of thousands to millions of dollars very easily as your favorite stocks decline. But if you have under a million, which I will assume 90% of you do, you do not need to EVER trade like this. Ride those BIG trends up and down. Carve up the face of the wave and enjoy the ride down. There is no reason to paddle into the market on your board backwards. Wait for the perfect setups and let the years of my research come back to reward you. That is what the CANSLIM system is all about: you guys.
It is definitely not easy but the strategy is so perfect that AAII has constantly ranked it #1 throughout the years of their tracking records of over 55 methodologies. IBD CANSLIM is in the top three of returns, with other similar growth methods topping it. So obviously growth is beating value. It might not in the mutual fund world due to the fact mutual funds cant short. But regular investors should be able to regularly crush value investors if they implore a form of the CANSLIM method. If you can find me JUST ONE value guy that can find so many huge winners that we find in bull markets from the most bullish price patterns, and I will convert to that style. However, my methodology has proven to be able to produce a ton of huge winners in every strong market. Besides K-Mart's 1000% gain which was NOTHING compared to TASR or TZOO, I can't think of too many other value stocks Cramer and the rest of those guys found that produced the gains that the new stocks like STP FSLR JASO can when they first start to move.
OK, enough about that. Let's get back to the market. The fact that CSCO did rally on such a large amount of volume might be bullish for the market and tech in the very short term but the strong downtrend that stared in November is still in tact and if this is the only high volume day and the stock does rally to the 200 day moving average the rest of the days on lower volume, then I would not mind looking to get short CSCO. But I am very short right now and I have almost all of my favorites that I wanted when the market topped based on price performance from 2002 to the top. Since I have most of the chemical stocks and all of the big-cap former tech leaders short, I feel very comfortable that I am in the right stocks if the selloff happens.
And then to go along with that, proving that being flexible is best (bullish in bulls, bearish in bears, neutral[trading both long/short] in chop) bet in markets that do whatever they want, longs like BVN CREE and URBN worked very well immediately, hinting that the bounce could last a bit longer due to some nice charts showing up. However, none of those longs are hot but it is nice to see the shorts I short go down or not up enough to force a cut loss or that most of my longs go higher with the market and do not pullback that much when the market moves lower. This is how proper trading works. And right now it is working.
Of course, if you are not skilled at being able to follow a bunch of stocks, seriously, cash continues to the smartest thing you can do in this market. The longer we chop and flop around the better the bases will be that will either lead to breakdown or breakouts. In the meantime most people are best being in cash. The past week, due to longs and shorts, with them working, I have gone from around 50% cash to a little over 20% cash. I got some more of my shorts that I have been looking to get real short and a couple of real nice longs started showing up with good fundamentals that needed some money thrown at them. So as of now it basically looks 57% short, 23% long, 20% cash. About 11 shorts make up 80% of my shorts and 6 longs make up 80% of my longs. I have 96 shorts and 49 longs. As you can see I carry a lot of $100-$1000 stocks to go along with a few stocks with as much as $25,000 in a few. And those stocks I would like to get $50,000 in. Most people can not monitor that many stocks and I like to look at it like this. Whatever you feel comfy with multiply by 10 and you have me. So if you have 20 stocks, that is like me having 200. So having 145 stocks is like you owning 14 to 15. Commissions are $0 for first 10 at zecco, $1 per 100 on MBT, Tradestation, and IB, $2.50 per trade at Just2Trade, $4.50 per trade no matter size on Tradeking. If you pay more than $4.50 per trade, you pay too much. If you pay more than $1 for 100 on a software platform you pay too much.
Some other reasons to not trade is that right now so many people are so new in the stock market that are in the game right now. i have so many more people emailing me saying they have been investing in the market for less than a year than those more than a year. So the fact all of these guys are so new should have most of them calming down and not trading as much. Right now, it is best to not buy the values when the values don't seem like values. Oh yeah, which now reminds me of the P/E ratio on the DJIA.
I keep trying to tell people your values are going to get more expensive as the stock falls if earnings start contracting. For those that don't believe me, take a look at this: the Price to Earnings Ratio of the Dow Jones Industrial Average from 11/26/07 of 15.5 to the 12/10/07 49.5 was both five year highs AND lows!!!! The just had the lowest P/E in five years back in November and then after a few bank earnings were announced and a couple of weeks later with the DJIA up 7% the P/E ratio flew from 15 to 49. Turning a very cheap market into a very expensive market. This is why I laugh in the face of ANYONE who talks to me about P/E. Those people obviously have never learned the correct way to trade and only know the wrong way. Now that the market is down 11% since 12/10, the P/E ratio is still a very high 44. So it has come down but something tells me P/E ratios are going to be rising while prices fall. That is bearish, not bullish.
Obviously, I understand, that this bounce can still last a lot longer and if that is the case my recent longs are going to be very happy and hopefully my new shorts will not rally as much and hold below key resistance. But with this very nasty downtrend, that started in November and happened on very heavy distribution, coming in such a short period of time leaving behind it such nasty chart patterns, I refuse to accept it as anything more than a bounce higher. I don't buy the BS of Wall Street. I only buy bull markets.
For those of you that are still long stocks you bought in October and November and you are underwater, you better get out now if the market continues to bounce before it rolls over and takes its real toll on you. Then you will be under too much pain and will be forced to sell when the majority of the selling would already have been done. Then the next bounce will have you so upset as you see the stock you just sold rally back. This has happened to ETFC holders recently and for some odd reason this group of numb-nuts continue to fall all over each other to buy this stock that they love so much. Yes, ETFC might have bottomed but the stock is not going to get you a 1000% gain in the next bull market. I don't give a crap about ETFC, I want to find the new ETFC so I can get me some of the real gains. In a new bull market while the value guys are happy with 100%, I will do my best to produce a 500-1000% return using 4 to 1 margin on IB. If you don't think it can be done, you are simply not looking at my 'past big winners' in my longs area on the homepages right hand area.
Before I finish this up and head on out to Hana on Sunday to make it an all-day adventure of beauty and amazement, I want to hit on a point I saw in the Big Picture in IBD when it comes to fear.
The paper said that there is a growing amount of fear out there via recession threats, housing market, subprime crisis, and other weak data on the macro front. However, that fear is not being seen by the actual investments in Wall Street. We all know a high put/call equals a lot of fear. However a put/call over 1 is bullish for a bounce right now but until we see the market fall 4% on the day with the put/call flying high over 1.5 to 1.7 then I will listen to the bottom callers. If that is confirmed with a VIX over 40 (35 would do for great bounce) and the investors intelligence survey reading showing bears ahead of bulls (preferably 40% bears at least, 35% bulls at least) then I will definitely believe we are near a bottom. If these readings are shown with HOT charts setting up or breaking out of incredibly solid patterns, then I will definitely be bullish. And then if a follow-through day hits with the market up over 3% on huge volume...then I will be back to being a bull baby! Until then, my claws are still as sharp as ever.
Great luck out there, thank you for all the kinds words this week. I definitely appreciate it. Despite the rough week for the market, it was a great week for us. Aloha and I will see you after an amazing road trip to Hana. ALOHA!
The best part about all of that is that no matter how wrong I ever am the great thing about this methodology is that we cut our losses when we are wrong. When you go long stocks that move up and go short stocks that move down, it is easy to know when you are wrong. That is whenever you lose money. If you lose money, you are wrong. However, in the world of value, as you lose money, it is supposedly (if you have done your "research") a better buy. So while it is great that your stock rises, it is "almost" (I am being a bit over the top but you should be able to understand that) better that a stock fall as you can now buy it at a cheaper price.
My biggest problem with this is that what happens once you get in a stock like Enron, Refco, Worldcom, Adelphia, or any other stock that has gone to zero? They tell you that you are supposed to only buy real quality stocks. OK, so let's go back to 2000 when a TON of values were created by EBAY YHOO CSCO ORCL DELL INTC JDSU QCOM. Do a me a favor and go back and check out how well those stocks have done since the 2000 highs. And make sure you use the highs. Because, just like RIGHT NOW, they were bullish and great values IMMEDIATELY when they started to selloff. So it isn't like they called them values after a 50% fall. They were values the whole way down. Just like our past leaders will be.
So please--I know this is an odd way to start this commentary off but I have to--do not start to look into buying GOOG RIMM AAPL BIDU. The chances that these values can create you real wealth in the future, after such a huge run, is very small. History clearly tells us that past big winners are never big winners again. Well not all but 90-95% of past big winners. Do you see QCOM and JDSU making the gains they did from 1998-2000 when they both returned 3000%. What is sad is that I had both of these longs but value guys scared me out of both in early 1999. Not only do value guys buy on the way down but they almost ALWAYS sell too early. Just be careful of all of these guys. Even if the market rallies a bit from here, if it is on lower volume and the charts are still sloppy, it will fail.
What we need to have before I can get excited about any market low is two things: 1. A real follow-through day on a huge price and volume gain with a lot of high quality stocks breaking out. 2. real fear seen by a VIX over 35 (MINIMUM!), put/call over 1.5, and the investors intelligence survey showing more bears than bulls. The survey hasn't pulled that off since the 2005 lows where a very smart money manager was telling me the market was done and that a bear market was starting. Guess what he is now? If you said a bull, you are correct. Guess how many years he has been doing this? Over 40. How can you go 40 years in this business without ever realizing CANSLIM is the best-of-the-best. I'll tell you how: ego.
Your ego can crush you in this game. What are the bottom callers going to do or say if we break to new lows? Will they say I was wrong? Will they say RevShark and Steven Smith were wrong? Is the stock market wrong? And that is the biggest problem with value guys. If we are in fact starting a bad bear market (obviously we have) every new low will be a new place to buy for them and every new low will be one step closer for us to go broke if we trade like that.
When you have billions, you can add hundreds of thousands to millions of dollars very easily as your favorite stocks decline. But if you have under a million, which I will assume 90% of you do, you do not need to EVER trade like this. Ride those BIG trends up and down. Carve up the face of the wave and enjoy the ride down. There is no reason to paddle into the market on your board backwards. Wait for the perfect setups and let the years of my research come back to reward you. That is what the CANSLIM system is all about: you guys.
It is definitely not easy but the strategy is so perfect that AAII has constantly ranked it #1 throughout the years of their tracking records of over 55 methodologies. IBD CANSLIM is in the top three of returns, with other similar growth methods topping it. So obviously growth is beating value. It might not in the mutual fund world due to the fact mutual funds cant short. But regular investors should be able to regularly crush value investors if they implore a form of the CANSLIM method. If you can find me JUST ONE value guy that can find so many huge winners that we find in bull markets from the most bullish price patterns, and I will convert to that style. However, my methodology has proven to be able to produce a ton of huge winners in every strong market. Besides K-Mart's 1000% gain which was NOTHING compared to TASR or TZOO, I can't think of too many other value stocks Cramer and the rest of those guys found that produced the gains that the new stocks like STP FSLR JASO can when they first start to move.
OK, enough about that. Let's get back to the market. The fact that CSCO did rally on such a large amount of volume might be bullish for the market and tech in the very short term but the strong downtrend that stared in November is still in tact and if this is the only high volume day and the stock does rally to the 200 day moving average the rest of the days on lower volume, then I would not mind looking to get short CSCO. But I am very short right now and I have almost all of my favorites that I wanted when the market topped based on price performance from 2002 to the top. Since I have most of the chemical stocks and all of the big-cap former tech leaders short, I feel very comfortable that I am in the right stocks if the selloff happens.
And then to go along with that, proving that being flexible is best (bullish in bulls, bearish in bears, neutral[trading both long/short] in chop) bet in markets that do whatever they want, longs like BVN CREE and URBN worked very well immediately, hinting that the bounce could last a bit longer due to some nice charts showing up. However, none of those longs are hot but it is nice to see the shorts I short go down or not up enough to force a cut loss or that most of my longs go higher with the market and do not pullback that much when the market moves lower. This is how proper trading works. And right now it is working.
Of course, if you are not skilled at being able to follow a bunch of stocks, seriously, cash continues to the smartest thing you can do in this market. The longer we chop and flop around the better the bases will be that will either lead to breakdown or breakouts. In the meantime most people are best being in cash. The past week, due to longs and shorts, with them working, I have gone from around 50% cash to a little over 20% cash. I got some more of my shorts that I have been looking to get real short and a couple of real nice longs started showing up with good fundamentals that needed some money thrown at them. So as of now it basically looks 57% short, 23% long, 20% cash. About 11 shorts make up 80% of my shorts and 6 longs make up 80% of my longs. I have 96 shorts and 49 longs. As you can see I carry a lot of $100-$1000 stocks to go along with a few stocks with as much as $25,000 in a few. And those stocks I would like to get $50,000 in. Most people can not monitor that many stocks and I like to look at it like this. Whatever you feel comfy with multiply by 10 and you have me. So if you have 20 stocks, that is like me having 200. So having 145 stocks is like you owning 14 to 15. Commissions are $0 for first 10 at zecco, $1 per 100 on MBT, Tradestation, and IB, $2.50 per trade at Just2Trade, $4.50 per trade no matter size on Tradeking. If you pay more than $4.50 per trade, you pay too much. If you pay more than $1 for 100 on a software platform you pay too much.
Some other reasons to not trade is that right now so many people are so new in the stock market that are in the game right now. i have so many more people emailing me saying they have been investing in the market for less than a year than those more than a year. So the fact all of these guys are so new should have most of them calming down and not trading as much. Right now, it is best to not buy the values when the values don't seem like values. Oh yeah, which now reminds me of the P/E ratio on the DJIA.
I keep trying to tell people your values are going to get more expensive as the stock falls if earnings start contracting. For those that don't believe me, take a look at this: the Price to Earnings Ratio of the Dow Jones Industrial Average from 11/26/07 of 15.5 to the 12/10/07 49.5 was both five year highs AND lows!!!! The just had the lowest P/E in five years back in November and then after a few bank earnings were announced and a couple of weeks later with the DJIA up 7% the P/E ratio flew from 15 to 49. Turning a very cheap market into a very expensive market. This is why I laugh in the face of ANYONE who talks to me about P/E. Those people obviously have never learned the correct way to trade and only know the wrong way. Now that the market is down 11% since 12/10, the P/E ratio is still a very high 44. So it has come down but something tells me P/E ratios are going to be rising while prices fall. That is bearish, not bullish.
Obviously, I understand, that this bounce can still last a lot longer and if that is the case my recent longs are going to be very happy and hopefully my new shorts will not rally as much and hold below key resistance. But with this very nasty downtrend, that started in November and happened on very heavy distribution, coming in such a short period of time leaving behind it such nasty chart patterns, I refuse to accept it as anything more than a bounce higher. I don't buy the BS of Wall Street. I only buy bull markets.
For those of you that are still long stocks you bought in October and November and you are underwater, you better get out now if the market continues to bounce before it rolls over and takes its real toll on you. Then you will be under too much pain and will be forced to sell when the majority of the selling would already have been done. Then the next bounce will have you so upset as you see the stock you just sold rally back. This has happened to ETFC holders recently and for some odd reason this group of numb-nuts continue to fall all over each other to buy this stock that they love so much. Yes, ETFC might have bottomed but the stock is not going to get you a 1000% gain in the next bull market. I don't give a crap about ETFC, I want to find the new ETFC so I can get me some of the real gains. In a new bull market while the value guys are happy with 100%, I will do my best to produce a 500-1000% return using 4 to 1 margin on IB. If you don't think it can be done, you are simply not looking at my 'past big winners' in my longs area on the homepages right hand area.
Before I finish this up and head on out to Hana on Sunday to make it an all-day adventure of beauty and amazement, I want to hit on a point I saw in the Big Picture in IBD when it comes to fear.
The paper said that there is a growing amount of fear out there via recession threats, housing market, subprime crisis, and other weak data on the macro front. However, that fear is not being seen by the actual investments in Wall Street. We all know a high put/call equals a lot of fear. However a put/call over 1 is bullish for a bounce right now but until we see the market fall 4% on the day with the put/call flying high over 1.5 to 1.7 then I will listen to the bottom callers. If that is confirmed with a VIX over 40 (35 would do for great bounce) and the investors intelligence survey reading showing bears ahead of bulls (preferably 40% bears at least, 35% bulls at least) then I will definitely believe we are near a bottom. If these readings are shown with HOT charts setting up or breaking out of incredibly solid patterns, then I will definitely be bullish. And then if a follow-through day hits with the market up over 3% on huge volume...then I will be back to being a bull baby! Until then, my claws are still as sharp as ever.
Great luck out there, thank you for all the kinds words this week. I definitely appreciate it. Despite the rough week for the market, it was a great week for us. Aloha and I will see you after an amazing road trip to Hana. ALOHA!
Sunday, February 03, 2008
Feel Free To Have Fun With Some Longs But Don't Make Any Long-Term Commitments
One of the most bullish weeks in years came to a close on Friday with most indexes making good gains despite the losses MSFT produced which you would think would ensure that the markets would have closed lower. However, the rest of the market rose steadily, helping to offset the losses in MSFT due to an announcement that they would like to have YHOO. This helped YHOO explode higher by 48% more than making up for the 6% smack MSFT was dealt. The worst part about the MSFT selling was that it was on extremely heavy volume that was even larger than the late October gap higher breakout.
But Friday's trading session did not leave a great taste in the mouth of investors after Thursday's "non-follow through day." For those investors and traders out there that believe the market has put in a very solid bottom they indeed do have the Nasdaq's volume signaling that they very well could be right. But this buying is not coming with the kind of gains that you normally see at real solid stock market bottoms and today's increase in volume was due to two stocks--YHOO and MSFT. This was one of the two to three main reasons IBD refused to call this a follow-through. Though volume is nice on the Nasdaq, the fact that yesterday's gain was only 1.74%, instead of a preferred 3% gain, and that Friday's gains were only 1% is a clear hint that it is probably not a good time to be going all-in with full margin in your favorite bargains that have pulled back 25-50% off of their highs.
There is one index out there that I think everyone should be paying attention to and very worried about. The IBD 100 index came in, on Friday, with another loss. This time it was only a .1% loss but that isn't much comfort to investors who make a living buying the best stocks in the best sectors in bull markets. On Thursday the IBD 100 lost 2% and on Friday it lost .1%, while the rest of the market rallied. This is called negative divergence and the exact opposite was seen in March 2003. Back then when the Nasdaq rallied 3 and 4%, the IBD 100 rallied 5 and 6%. This is how the IBD 100 was acting back in August in that last rally to the November top. Back then leaders led and the gains were justifiably rewarded. But the rally from last August to the February top was infected with big-caps only leading. Not a sign of a healthy market and an early warning of what we were in for come November.
Besides the lagging in the IBD 100 compared to the rest of the general stock market, there are of course quite a few bottom non-confirmation signals out there including the levels of fear. Last time I checked on Friday every single value investor was declaring victory of their style as stocks rallied back 20% off their lows. Too bad this came after a 50% plus decline in a lot of stocks making the value investors argument sounding ignorant if not foolish yet again. I don't care about these little bounces and if you are interested in making the big money you will not be either. Instead having a healthy level of cash is the right play right now. Especially without fear.
The bears finally climbed this week to 32% in the investors intelligence survey but the bulls still reign at 40%. This index is still not as close to crossing as it was in August. That is why the rally in August worked with some nice CANSLIM quality longs while this one is not finding any. The last time this index crossed was back in October of 2005 which was a long time ago. For those of you who are too new to remember that time frame, a lot of investors/traders were veary bearish and were very sure the top was in. Guess who was still bullish as I was still finding a lot of good strong green stocks setting up in bases? That's right.
Besides the investors intelligence survey, the put/call ratio continues to show that most market traders are not fearful. They began to get very emotional and fearful back in December but as we started to selloff in January on huge distribution oddly enough the crowd became more complacent and now stands at .78 which is very pretty low relative to its trading range recently. The crowd is, once again, getting bullish and hopeful.
Finally, the VIX, continues to be a joke putting in some very lame readings and now tumbling 8.3% on Friday to 24. This is a clear tell to me that the crowd has in fact become very complacent in thinking that they have found the bargains. The stocks that have not been so cheap in years are finally cheap enough to buy. The AAPL, BIDU, RIMM, and GOOG shares are finally at a price a lot have waited patiently for and their smart bargain hunting is for sure to lead to big powerful gains. Too bad that history shows that when your next door neighbors have finally heard about a stock you (if you are a pro) have been following for years, it is more than likely probably near a top. Right now, I see a lot of bargain hunting and this might turn out to be a smart play. But if it works this time, this will be the first end of a bear market I have ever seen that has come with a huge selloff on huge distribution with powerful selling hitting the market without an intraday washout on huge volume that then leads to a bull. Every single heavy volume distribution has led to a low volume rally that has led to more lows. I can't see how this could be different now.
So the leading indexes are wrong, the leading stocks are wrong, and sentiment is wrong. Is there anything right? No. There really isn't. It is possible the fact that there is nothing out there that looks great could be the destructive quiet before the storm of HOT charts. But I truly doubt that. The fact is that as we move along with my past big winners, you are going to start to see a lot show up in 2002 before the 2003 stock market follow-through launched a powerful rally. The simple facts show over and over that we will have hot new leading stocks in fresh brand new leading sectors that have max green BOP filled charts breaking out of near-perfect to perfect patterns. Then as the rally goes along, we then eventually find our TASR, FMDAY, and IST charts. You just have to be patient. If you are trying to get rich RIGHT NOW, chances are you are going to come out of this market with a lot less in your brokerage account. I am telling you, cash is king, at this moment.
Even though the SP 600 was up 2.4% on Friday there still was not a lot of new longs that have great chart patterns. On Thursday's very strong powerful rally there were only four stocks that I deemed high enough quality to be worthy of a new long position. Out of those four CANSLIM quality longs none really had an amazing day on Friday that would have me convinced that I am wrong about my market analysis and that I need to get more long. Friday, however, does have one long that if it just had max green BOP would be a near-perfect long as it is bouncing right off the 50 day moving average after finding very strong support at the 200 day moving average. So this is good to see, in this ugly market.
Having a few longs show up during bear market bounces allows us to get long the few stocks that actually rise in markets that fall. The one thing that should be very obvious is that the watchlist for longs and my new longs are consistently made up of defensive quality longs that do well in bear markets. A lot of people are saying that the sectors that are moving up now are the new leaders. These people are way too new and are making ignorant statements as it takes 9 months to 18 months to move from one area of market leadership where the fundamentals are exploding into the next. Medical, Funeral, Pollution, Energy, Waste Management, Utilities-Gas Distribution, Diversified Research, and Drug sectors are not "new fresh bull market" sectors that help put a real floor in the stock market that leads to big gains for the market and stocks. There is always a bull market somewhere, even in bear markets. What you have now are bullish stocks in bullish sectors in bear markets.
While there isn't much that has changed in regards to my opinion about the stock market there is one thing that almost never is based on my opinions. And that is my trading. Every single buy and sell decision I make is based off of either the stocks technicals or the combination of fundamentals and technicals. To bring my opinion into any buy or sell only ensure that I will not be able to handle my trades properly. But there is a methodology that does use a lot of opinions and that is value investing. And recently the value investors that have been so wrong since the top in November have been very vocal about calling a market bottom. What is funny is that they were just doing the last time the Fed cut rates. So the fact that they are doing it again yet us more technically inclined investors are questioning them has them quite in a fuss. Which is just silly.
While it is fine to believe that the market may have put in some lows because you feel that you have to buy the Fed here with them cutting rates, I come from the camp that says when the Fed is cutting rates the Fed is signaling to you that the economy is in trouble. That is why when rates are being cut, the stock market normally falls (2000-2002 and NOW). It is simple history since the early 90s that when the Fed is raising rates, the stock market usually rises. The opposite is also true. So the fact that the Fed is SLASHING rates right now and so many are telling me to buy stocks seems a little beyond absurd. In fact it seems downright ridiculous and insulting. To say that we should buy stocks here right after they were clearly sold to us by the institutional investors almost comes across as if some commentators were directly in bed with some boys at the big banks. The reason I say that is because I continue to remind you that I have never seen a market selloff on so much distribution like we just saw, not have an intraday swoon on huge volume, and then rally straight back to new highs. Why anyone thinks this one will also is straight up dangerous.
Now, obviously, I would be saying something different IF the stock market would have sold off on lower volume and the rally that we recently have seen would have come on huge accumulation with a ton of max green BOP filled charts setting up and breaking out of near-perfect to perfect patterns. Not only would I be telling you all that we have bottomed here if I could see the charts right now, I would be telling you which stocks and which charts look the best. And besides having these great longs I would expect bears to outnumber bulls by 45% to 35% in the investors intelligence survey, the put/call ratio to hit 2.0, and the VIX to top and stop anywhere between 55 and 70. If we had that right now, boy oh boy, would I ever be bullish. I would darn near be screaming if from the rooftop.
However, we don't have anything that signals this as a bottom and that is why the loud bottom calls from Robert Marcin, Jim Cramer, and EVERY OTHER commentator on CNBC is really disturbing. If these indexes looked just like the 2003 indexes, then I would have no problem. But after a five year plus bull market where stocks everywhere have started cracking on huge distribution which has led to an IBD 100 being left with stocks in horrible bases and the CANSLIM Select list being left with very few stocks remaining on that list. This resulting action in leading stocks has then left the IBD New America, 100, and 85-85 index with Acc/Dis ratings of E. When stocks bottomed in 2002 and then launched their powerful follow-through days in March 2003 the Acc/Dis ratings were A. So how can everyone be so cocky here?
To me it is just mind-boggling to be so hardcore bullish or bearish here as it has been very volatile recently. Without a true follow through day it is impossible to be too bullish and with stocks breaking down and then reversing it is hard to be too bearish. Some past big winners have performed very well since I initiated my shorts (BIDU RIMM GOOG AAPL GRMN) but some are not working out alright (FSLR AMZN). Besides that the #1 sector the entire bull market was Chemical stocks. This sector has been number one for so long and I was very blessed to be long TNH and MOS for some huge gains. But I am now out of these longs as they appear to be getting toppy, to go along with the market topping, and I am waiting to enter my shorts. The fact that they are still holding up is just another testament that the big trend might be down but the momentum is not quite right yet. These past leaders will crack and when they do I wan to get very short.
And then when the time has passed to be short, I want to be long the new leading stocks from fresh brand new leading sectors of the economy. We could be waiting a very long time, with the crowd still so bullish after this much hard selling. This weeks rally being the best one since the follow-through week in 2003 has turned a lot of cautious bulls into hardcore bulls believing the worst is behind us. The problem with this is the charts don't agree, the market's trading does not agree, sentiment does not agree, the timing does not agree, and the fact the value boys are going after the shorts so aggressively is just another reason to not be on their side.
I could understand nobody wanting to listen to me if I would have been a bear the entire way from the year 2000. But considering I have been a bull from 1996-March 2000, a bear from March 2000 to October 2002, a bull from October 2002 to November 2007, and a bear from November 2007 to now makes it hard to go off and call me a perma-bear. The trend is your friend and the trend is definitely my friend. I never fight the trend and all of those that do usually end up paying a price sometime in the future.
When this bull market is over, I will be able to spot the next TASR. Did Cramer or Robert Marcin find it in 2003? Is Cramer or Marcin telling you to short AAPL RIMM GOOG BIDU or GRMN? But I have been and they have all made us money. Besides these shorts, I have one large long which is FFH (beautiful chart; the best in my portfolio) but the rest of the money is in cash. Cash is such a pimp right now it represents 55% of my account. There is no clear trend out there and there are no perfect charts, hence a lot of cash.
This very volatile, complacent, and confusing market will give way to a strong trend shortly. Chances are it will be down again, since we are coming from a reversal where the trend is down. However, for you newbies, you don't have to make a lot of money right here in shorts. Just by going to cash and getting out of the longs that are losing you money you will be able to outperform the market and if you can keep that cash heavy and wait for that perfect long setup you will be able to make a lot of money when that perfect moment comes. Trust me, it will come again. It always has, especially after bear markets where plenty of jaded players declare that there will never be another rally. Aloha and I will see you in the chat room. Don't forget to read my column this weekend on RealMoney.
But Friday's trading session did not leave a great taste in the mouth of investors after Thursday's "non-follow through day." For those investors and traders out there that believe the market has put in a very solid bottom they indeed do have the Nasdaq's volume signaling that they very well could be right. But this buying is not coming with the kind of gains that you normally see at real solid stock market bottoms and today's increase in volume was due to two stocks--YHOO and MSFT. This was one of the two to three main reasons IBD refused to call this a follow-through. Though volume is nice on the Nasdaq, the fact that yesterday's gain was only 1.74%, instead of a preferred 3% gain, and that Friday's gains were only 1% is a clear hint that it is probably not a good time to be going all-in with full margin in your favorite bargains that have pulled back 25-50% off of their highs.
There is one index out there that I think everyone should be paying attention to and very worried about. The IBD 100 index came in, on Friday, with another loss. This time it was only a .1% loss but that isn't much comfort to investors who make a living buying the best stocks in the best sectors in bull markets. On Thursday the IBD 100 lost 2% and on Friday it lost .1%, while the rest of the market rallied. This is called negative divergence and the exact opposite was seen in March 2003. Back then when the Nasdaq rallied 3 and 4%, the IBD 100 rallied 5 and 6%. This is how the IBD 100 was acting back in August in that last rally to the November top. Back then leaders led and the gains were justifiably rewarded. But the rally from last August to the February top was infected with big-caps only leading. Not a sign of a healthy market and an early warning of what we were in for come November.
Besides the lagging in the IBD 100 compared to the rest of the general stock market, there are of course quite a few bottom non-confirmation signals out there including the levels of fear. Last time I checked on Friday every single value investor was declaring victory of their style as stocks rallied back 20% off their lows. Too bad this came after a 50% plus decline in a lot of stocks making the value investors argument sounding ignorant if not foolish yet again. I don't care about these little bounces and if you are interested in making the big money you will not be either. Instead having a healthy level of cash is the right play right now. Especially without fear.
The bears finally climbed this week to 32% in the investors intelligence survey but the bulls still reign at 40%. This index is still not as close to crossing as it was in August. That is why the rally in August worked with some nice CANSLIM quality longs while this one is not finding any. The last time this index crossed was back in October of 2005 which was a long time ago. For those of you who are too new to remember that time frame, a lot of investors/traders were veary bearish and were very sure the top was in. Guess who was still bullish as I was still finding a lot of good strong green stocks setting up in bases? That's right.
Besides the investors intelligence survey, the put/call ratio continues to show that most market traders are not fearful. They began to get very emotional and fearful back in December but as we started to selloff in January on huge distribution oddly enough the crowd became more complacent and now stands at .78 which is very pretty low relative to its trading range recently. The crowd is, once again, getting bullish and hopeful.
Finally, the VIX, continues to be a joke putting in some very lame readings and now tumbling 8.3% on Friday to 24. This is a clear tell to me that the crowd has in fact become very complacent in thinking that they have found the bargains. The stocks that have not been so cheap in years are finally cheap enough to buy. The AAPL, BIDU, RIMM, and GOOG shares are finally at a price a lot have waited patiently for and their smart bargain hunting is for sure to lead to big powerful gains. Too bad that history shows that when your next door neighbors have finally heard about a stock you (if you are a pro) have been following for years, it is more than likely probably near a top. Right now, I see a lot of bargain hunting and this might turn out to be a smart play. But if it works this time, this will be the first end of a bear market I have ever seen that has come with a huge selloff on huge distribution with powerful selling hitting the market without an intraday washout on huge volume that then leads to a bull. Every single heavy volume distribution has led to a low volume rally that has led to more lows. I can't see how this could be different now.
So the leading indexes are wrong, the leading stocks are wrong, and sentiment is wrong. Is there anything right? No. There really isn't. It is possible the fact that there is nothing out there that looks great could be the destructive quiet before the storm of HOT charts. But I truly doubt that. The fact is that as we move along with my past big winners, you are going to start to see a lot show up in 2002 before the 2003 stock market follow-through launched a powerful rally. The simple facts show over and over that we will have hot new leading stocks in fresh brand new leading sectors that have max green BOP filled charts breaking out of near-perfect to perfect patterns. Then as the rally goes along, we then eventually find our TASR, FMDAY, and IST charts. You just have to be patient. If you are trying to get rich RIGHT NOW, chances are you are going to come out of this market with a lot less in your brokerage account. I am telling you, cash is king, at this moment.
Even though the SP 600 was up 2.4% on Friday there still was not a lot of new longs that have great chart patterns. On Thursday's very strong powerful rally there were only four stocks that I deemed high enough quality to be worthy of a new long position. Out of those four CANSLIM quality longs none really had an amazing day on Friday that would have me convinced that I am wrong about my market analysis and that I need to get more long. Friday, however, does have one long that if it just had max green BOP would be a near-perfect long as it is bouncing right off the 50 day moving average after finding very strong support at the 200 day moving average. So this is good to see, in this ugly market.
Having a few longs show up during bear market bounces allows us to get long the few stocks that actually rise in markets that fall. The one thing that should be very obvious is that the watchlist for longs and my new longs are consistently made up of defensive quality longs that do well in bear markets. A lot of people are saying that the sectors that are moving up now are the new leaders. These people are way too new and are making ignorant statements as it takes 9 months to 18 months to move from one area of market leadership where the fundamentals are exploding into the next. Medical, Funeral, Pollution, Energy, Waste Management, Utilities-Gas Distribution, Diversified Research, and Drug sectors are not "new fresh bull market" sectors that help put a real floor in the stock market that leads to big gains for the market and stocks. There is always a bull market somewhere, even in bear markets. What you have now are bullish stocks in bullish sectors in bear markets.
While there isn't much that has changed in regards to my opinion about the stock market there is one thing that almost never is based on my opinions. And that is my trading. Every single buy and sell decision I make is based off of either the stocks technicals or the combination of fundamentals and technicals. To bring my opinion into any buy or sell only ensure that I will not be able to handle my trades properly. But there is a methodology that does use a lot of opinions and that is value investing. And recently the value investors that have been so wrong since the top in November have been very vocal about calling a market bottom. What is funny is that they were just doing the last time the Fed cut rates. So the fact that they are doing it again yet us more technically inclined investors are questioning them has them quite in a fuss. Which is just silly.
While it is fine to believe that the market may have put in some lows because you feel that you have to buy the Fed here with them cutting rates, I come from the camp that says when the Fed is cutting rates the Fed is signaling to you that the economy is in trouble. That is why when rates are being cut, the stock market normally falls (2000-2002 and NOW). It is simple history since the early 90s that when the Fed is raising rates, the stock market usually rises. The opposite is also true. So the fact that the Fed is SLASHING rates right now and so many are telling me to buy stocks seems a little beyond absurd. In fact it seems downright ridiculous and insulting. To say that we should buy stocks here right after they were clearly sold to us by the institutional investors almost comes across as if some commentators were directly in bed with some boys at the big banks. The reason I say that is because I continue to remind you that I have never seen a market selloff on so much distribution like we just saw, not have an intraday swoon on huge volume, and then rally straight back to new highs. Why anyone thinks this one will also is straight up dangerous.
Now, obviously, I would be saying something different IF the stock market would have sold off on lower volume and the rally that we recently have seen would have come on huge accumulation with a ton of max green BOP filled charts setting up and breaking out of near-perfect to perfect patterns. Not only would I be telling you all that we have bottomed here if I could see the charts right now, I would be telling you which stocks and which charts look the best. And besides having these great longs I would expect bears to outnumber bulls by 45% to 35% in the investors intelligence survey, the put/call ratio to hit 2.0, and the VIX to top and stop anywhere between 55 and 70. If we had that right now, boy oh boy, would I ever be bullish. I would darn near be screaming if from the rooftop.
However, we don't have anything that signals this as a bottom and that is why the loud bottom calls from Robert Marcin, Jim Cramer, and EVERY OTHER commentator on CNBC is really disturbing. If these indexes looked just like the 2003 indexes, then I would have no problem. But after a five year plus bull market where stocks everywhere have started cracking on huge distribution which has led to an IBD 100 being left with stocks in horrible bases and the CANSLIM Select list being left with very few stocks remaining on that list. This resulting action in leading stocks has then left the IBD New America, 100, and 85-85 index with Acc/Dis ratings of E. When stocks bottomed in 2002 and then launched their powerful follow-through days in March 2003 the Acc/Dis ratings were A. So how can everyone be so cocky here?
To me it is just mind-boggling to be so hardcore bullish or bearish here as it has been very volatile recently. Without a true follow through day it is impossible to be too bullish and with stocks breaking down and then reversing it is hard to be too bearish. Some past big winners have performed very well since I initiated my shorts (BIDU RIMM GOOG AAPL GRMN) but some are not working out alright (FSLR AMZN). Besides that the #1 sector the entire bull market was Chemical stocks. This sector has been number one for so long and I was very blessed to be long TNH and MOS for some huge gains. But I am now out of these longs as they appear to be getting toppy, to go along with the market topping, and I am waiting to enter my shorts. The fact that they are still holding up is just another testament that the big trend might be down but the momentum is not quite right yet. These past leaders will crack and when they do I wan to get very short.
And then when the time has passed to be short, I want to be long the new leading stocks from fresh brand new leading sectors of the economy. We could be waiting a very long time, with the crowd still so bullish after this much hard selling. This weeks rally being the best one since the follow-through week in 2003 has turned a lot of cautious bulls into hardcore bulls believing the worst is behind us. The problem with this is the charts don't agree, the market's trading does not agree, sentiment does not agree, the timing does not agree, and the fact the value boys are going after the shorts so aggressively is just another reason to not be on their side.
I could understand nobody wanting to listen to me if I would have been a bear the entire way from the year 2000. But considering I have been a bull from 1996-March 2000, a bear from March 2000 to October 2002, a bull from October 2002 to November 2007, and a bear from November 2007 to now makes it hard to go off and call me a perma-bear. The trend is your friend and the trend is definitely my friend. I never fight the trend and all of those that do usually end up paying a price sometime in the future.
When this bull market is over, I will be able to spot the next TASR. Did Cramer or Robert Marcin find it in 2003? Is Cramer or Marcin telling you to short AAPL RIMM GOOG BIDU or GRMN? But I have been and they have all made us money. Besides these shorts, I have one large long which is FFH (beautiful chart; the best in my portfolio) but the rest of the money is in cash. Cash is such a pimp right now it represents 55% of my account. There is no clear trend out there and there are no perfect charts, hence a lot of cash.
This very volatile, complacent, and confusing market will give way to a strong trend shortly. Chances are it will be down again, since we are coming from a reversal where the trend is down. However, for you newbies, you don't have to make a lot of money right here in shorts. Just by going to cash and getting out of the longs that are losing you money you will be able to outperform the market and if you can keep that cash heavy and wait for that perfect long setup you will be able to make a lot of money when that perfect moment comes. Trust me, it will come again. It always has, especially after bear markets where plenty of jaded players declare that there will never be another rally. Aloha and I will see you in the chat room. Don't forget to read my column this weekend on RealMoney.
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