Wednesday, December 03, 2008

Nice Rally Today Too Bad It Was On Below Average Volume

Today's rally, while it probably made you feel all nice and warm on the inside, was still as cold as the grips of a long term bear market. Why? The leadership, silly. The leaders are all still coming from groups that reside in the bottom 25% of industry groups. When you have a real bull market from a bottom you can be FOR SURE that the top 25% of industry groups based on price performance will be leading the way.

Right now, there is only one area of leadership, and I am sorry folks that is not going to cut it. That group is the education stocks which are being helped by the only recent IPO out there in LOPE. Besides that we really do not have any amazing group leading. Business Services is such a diversified area that while some stocks look great some look horrible. The facts of a bull market show that in a real bull market rally leading stocks in leading groups help lead the market higher.

What we could have here is a bear market bounce. If that is the case, I am more than willing to play the long side. That is why I have four longs with a fifth one being added tonight. However, while I am willing to play the longs, I will make sure that I do not dump my short positions. And speaking of dumping short positions, if we really were turning into a new bull, I would have more long term winning shorts giving full cover signals. Instead, I am only having recent shorts fail which is not unexpected when you were so far extended from the 50 and 200 day moving average in this downtrend.

Today's rally also only gave us one new possible long and there is a problem with it. While the longer base may appear long enough on this stock, the right side is still not symmetrical with the left side which always increases the chance of failure in a stock. Therefore, I can not load up on this stock. I have to remain cautious and keep it small.

Now, if I would have had a few shorts with 50%+ gains give me full cover signals and I would have had 3-5 new long candidates then I might decide to go heavy into a certain long. However, that can not happen as long as this market is trending below the 200 DMA with the 50 DMA leading it lower. To go along with that poor action, the price has steadily remained below the 50 DMA since June making for one very ugly stock market.

Until the indexes can even get above the 50 DMA, nobody in their right mind should think of dropping 20%+ of one's account into any one position. When we have a real turn and "hot" charts are popping up everywhere, then you can feel free to go about and buy heavily the BEST breakouts. Not the stocks "bouncing" off "bottoms" below the 50/200 DMA. Those stocks will never produce for you the kind of gains stocks like NTES, SOHU, SINA, and TASR can after a bear market. QCOM and JDSU can be used as examples in the 98-00 rally following LTCM. GE sure didn't come close to QCOM during that time. This is why you got to stick with the leaders. If you do that you can still get some nice gains:

top longs/(shorts) and their total returns that were up today: QCOR 39% (CAJ 34% MOS 68% AMX 47% ARB 72% GGB 63% SPW 69% SDA 78% POT 67% CETV 83%). Right now, in a volatile market, you can trade around cheap stocks that will go to zero and make good money. But when the next bull market starts, and you can trust me there WILL BE another bull market, you will be stuck trying to trade the laggards while the real winners go racing higher without you.

Make sure, if you are new to the stock market, you understand one style before switching to the next. Unless you think something is completely not for you, switching styles just because it is not working RIGHT NOW is seriously very very stupid. Only the ignorant do something like that. Every person reading this should understand not every system works all the time. Every methodology/system will have times that things are not going perfect. This is why cutting losses is the most important thing. Don't forget, if you lose 7%, you just need a 7.5% gain to get back to even. However, if you lose 50%, you need a 100% return just to break even. Worse, if you lose 98%, you will need a 1,900% return just to break even. Still think "averaging down" (a LOSERS game) is a smart decision?

The greatest average up not down. Livermore, Baruch, Loeb, Dreyfus, Wyckoff, O'Neil, Darvas, Roppell, and every other successful active-investor I know right now, all cut their losses fast and let their winners ride while adding to their best positions. Stay positive and if you really want to get in the game and learn how to beat the market year in and year out you should be happy to know you are in the right place.

Stock Market Wrap video one and two full size version available to Platinum and Gold subscribers on the Gold forums. Free youtube small version available below:

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