Thursday, December 04, 2008

Late Day Selloff On Lower Volume Shows The Bulls Are Not Ready To Run; A Test Of The Lows Might Be Needed To Get A Real Bounce

Today continued a pattern that we have seen lately and that is mainly last hour insanity. We had a pretty dull day going but in the last hour the market completely puked it up and in the last few minutes another little nutty rally helped take the market off the lows. The good news about the selling was that it was on lower volume. The bad news about the selling is that it seemed to hit the few strong stocks that were out there. This could be bad news for a potential rally.

If leading stocks can not get anything going and keep it going it is going to be very hard for this market to hold up and produce the gains that so many are looking for. I think that so many think this market is oversold that we have to rally. I hate to tell some of these people this little tidbit but if mutual, pension, and hedge funds continue to get daily redemption calls and momentum investors continue to abuse the no uptick rule it could be a while before that magical bottom that has been called repeatedly the last year. I think there have been at least 5-6 MAJOR bottom calls by the media and NONE of them have been right. Eventually they will get it right but at what cost to your portfolio.

I will simply never understand why those who decide to get involved in the stock market in the first place will not do more homework and can not grasp the idea that you should be long a market moving up and either short or cash in a market moving lower. Selling stocks higher in anticipation of them falling and buying stocks crashing to earth because they are too cheap barely made sense to me when I read my first book on investing. I find it impossible to believe, now, that so many people still believe in this mantra.

If you don't think they do, think of how many people have asked you if stocks are "cheap" enough to buy now. If you are in the business like me and live somewhere where people are basically walking tools of whatever the newest trend in thinking and believing is you will quickly find out that everyone wants to know if stocks "are cheap enough to buy." Not only that but they seem to want to buy the stocks hit the hardest trading around $1 to $5. This proves, yet again, that basic history has not even been studied.

If anyone would actually do the research or even look-up the data that IBD did on this they found out that stocks making fresh 52-week highs do MUCH BETTER in one year than stocks that make fresh 52-week lows. History has PROVEN that stocks hitting new lows for the first time continue to do so for some time in the future, the majority of the time. On the opposite end, in bull markets, stocks that hit fresh new 52-week highs continue to go on to make new 52-week highs. This is NOT my opinion. These are facts from IBD. I obviously can not give you the number as I do not have the most recent data on this. However, my own experience has ABSOLUTELY PROVEN this to be the case. Just reviewing my blog going back to 2005 can prove this.

The point of this conversation is to make sure that you do not get "bored" or "antsy" and decide that CANSLIM investing is not working now so I must switch. Unless you are a pro and KNOW that you can switch back once a REAL follow-through day with leaders popping up everywhere shows up, there is no way I want you to force trades. Now, if you decide that CANSLIM investing is not for you and you do want to bottom fish, I can guarantee two things.

The first thing I can guarantee is that in bear markets, you will get SLAUGHTERED. Look at ALL of the mutual funds this year that are forced to be long most of their account and are forced to buy stocks that pullback to "bargain" levels because they are so big they can not chase stocks higher. Most of these funds are down anywhere from 30% to 70% this year. So bear markets WILL KILL you using a "value" way to investing. Just look at Jim Cramer's Action Alert Portfolio. That is a 45% loss mess. I don't know about you but I can't lose 45%. If I lose 45%, I can't make a living doing this anymore. So I will keep ALL my losses HOPEFULLY to 10%/8%/5% or less.

The second thing I can guarantee is that you will not be holding any winners up 500% to 3000% in under a year, in a bull market. That is for sure. Buying stocks near the lows means that you are buying a stock with overhead resistance. This overhead resistance usually leads to a choppy upward move when it does rally. Most "value" stocks are down in the dumps because they have normally already had their growth stage and big price run up. Check out JDSU, QCOM, MSFT, DELL, and WMT. Do you think they will EVER get to their old highs? And now some of you think RIMM, AAPL, BIDU, and GOOG will. That is a farce and if you are buying AAPL and RIMM because it is cheap you have not done ANY RESEARCH ON HISTORY. OLD LEADERS ARE NEVER NEW LEADERS AGAIN!!!!!!!! Look at CSCO and all the other stocks I just listed. Back in 2000-2002 EVERYONE on CNBC said to buy these as they "were the leaders." Too bad these guys didn't understand the definition of leader in the stock market.

Leader does not mean the biggest with the big price run already BEHIND it. A leader is a stock with great EPS and sales growth that is breaking out from a beautifully sound chart pattern that has NOT already had a HUGE price run up. A 20% move from the lows to the base that it builds is OK. But if the stock has gained 3000% and sets up again, you can be sure it is not going to be a safe long. You want fresh new highs. Not old constant new highs.

So if you want to make the big money in the bull market and save your money in a bear market, you DEFINITELY NEED TO LEARN THE CANSLIM SYSTEM!!! Once you have that down and know you got the system down, then you can try to daytrade the ETFs or futures or try your hand at options. But until you get the best methodology down to make big money, the other systems will eventually cost you a heavy tuition. Cutting losses fast is the ONLY way to prevent oneself from going broke in the market. If you only use 5-20% per long/short in your account, do you know how many 5% cut losses it will take before you go broke? You are right! A long time. But if you put 100% in a stock like DMND and at the close you check on it and see it is down 21%, you are going to be in a LOT of pain. A few more like that and you will be broke. A 98% loss takes a 1,900% gain to come back. A 5% loss takes a 5% gain to break even. A 10% loss takes just over 11% to break even.

To me it makes COMPLETE sense to cut my losses short and not to let them get out of hand. This is basics. But sadly many NEVER learn this. That is their loss and our gain. This is why when this volatile market is over, CANSLIM investing will end up returning HUGE gains to those ready. It always has and it always will.

God bless you William J. O'Neil and thank you W. Scott O'Neil for taking the torch. I will be a subscriber for life! If you don't have a subscription to IBD I HIGHLY recommend it and if you want to become a member of this site I would take advantage of this offer now because it will not be back for another 12 months and then there is no guarantee it will even be back if we get too big.

Thank God tomorrow is Friday. It has been a very dull week, overall. top longs/(shorts) up today and their total returns since purchase: QCOR 44% (APD 50% ENB 15% MOS 69% SBAC 57% AMX 48% K 18% LLL 29% TITN 53% SPG 44% CYT 62% AMSG 17% SPW 70% CEDC 65% RIMM 62% AAPL 45% ARB 73% RDK 19% PLCE 24% GGB 65% ATHR 47% CAJ 38% POT 69% CEO 41% OKE 42% IPHS 37% CASY 19%)


Stock Market Video Wrap part one and part two are available on the Gold Forums. Part one small version will be available here for Free and Silver members:

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