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. (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%)

No comments: