Wednesday, January 07, 2009

Leading Stocks Remain on Shaky Ground as Small Caps Lead the Market Higher on Volume

Housecleaning item: Josh went to the "L" in Lahaina today and left him just enough time to get updated. Rest assured, Josh is fine and will be back writing commentary.

Stocks were able to shake off Monday's heavier volume selling by bouncing back higher on higher volume. Price action as of late has been positive while volume has been on the light side. Small caps lead the rally today as the Russell 2000 rose 1.9%. However, leading stocks continue to struggle to catch up to the broader market averages. IBD indexes still show accumulation far below the major averages, suggesting the leadership in the market is not destined to lead to a new bull market. Quite simply, we are moving higher in a bear market.

The most compelling story is the lack of strong leadership in the market. Normally, IBD indexes of leading stocks would be outpacing all broad market averages. New Bull markets show new leadership breaking out on volume and not looking back. However, we are faced with a market where leadership is spotty and old leaders are the ones leading. Stocks who lead that are moving off lows is not the "ideal" leadership you want to see for a sustainable rally. Despite of this fact there are still gains to be had in this market, but it will be quick and one must be able to take profits fast.

I have studied the 1937 high thru the 1938 low and the ultimately low in 1942 prior to the massive bull market started immediately after that low. We are mirroring the price and volume action of the 1938 low. From its high to low the Dow Jones Industrial averaged dropped 50%, but from its 1938 low to high it rallied back 50%. This is not the only time in history stocks have repeated this move, in the late 1890s stocks moved in similar fashion. Will we rally above 1900 on the NASDAQ or 1100 on the S&P500 remains to be seen but history does show stocks can snap back significantly.

Swinging back around to today's action we did see a positive move in the New High vs New Low ratio. What is troubling is the fact that ETFs are included in both of the New High and New Low numbers. At any rate, we have seen a positive move in this ratio suggesting we can still move higher.

If you are sitting on profits at the moment, it is a wise move to book those profits. Rallies occurring in Bear Markets tend to be quick, duration is very short and profits can be lost quickly. The worse thing that can happen is if you are sitting on 20% profits and that quickly evaporates into a 5% loss. Capital preservation is a vital skill to learn in order to have a fighting chance during the next bull market.

Josh will be posting a video at the end of this commentary, if you do not see it please return later to view the video. Please note, that the video attached here and other videos are available to our gold and platinum subscribers. These videos are top notch quality, not just the content but the quality of video is far superior.

I wish you all success in 2009 and if you aren't a member of Big Wave Trading I look forward to seeing you become one.

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