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!

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