Saturday, February 23, 2008

Late-Day Bullish Reversal Off The Lows Keeps Stocks From Hitting New February Lows; Volume Remains Below Average, For A Full Second Week In-A-Row

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%)

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