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.

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