Wednesday, January 07, 2009

This Is Why I Don't Trust Low Volume Rallies; Ugly News Slams Stocks On Lower Volume

Stocks had a nasty day on Thursday as the general market indexes all sold off with the Nasdaq, SP 500, and SP 600 all losing between 3% to 3.5% on the day. The good news about the losses is that volume pulled back on today's trading in all but the Dow Jones Industrial Averge. The DJIA was also the best performer today besting the market with a 2.7% loss.

Now, normally when the stock market pulls back on low volume, after an initial start of a rally I feel that this is a constructive day. However, today's low volume pullback had the wrong feeling to it. That feeling is not hard for me to see but might be a little hard trying to explain it this late at night (It is 11pm; I'll have you ready for the opening bell). However I will do my best.

The first clue that this rally was probably going to run into a rough patch was that since the November lows volume has been non-existent on the rally into Wednesday morning. The few stocks that have had a rally with strong volume continue to have nasty reversals sometime either right before a breakout appears to be within distance or some time right after the successful breakout has taken the stock higher just enough for you to believe this time stocks are going to work this time. These are all warnings of a market that is in the middle of a bear market bounce and not at the start of a new bull market.

Another thing that threw up a warning flag for me today was the fact that the investors intelligence survey came out and shows that bulls are now up to 42% while the bears are at 34%. This is not really surprising as the crowd (including smart money managers) has wanted to be bullish for a long time (even back in March). But with the market in a constant selloff, all those value dip-buyers ended up being burned left and right. Not only are investor newsletter writers getting bullish on the way up but the retail crowd is showing very high levels of bullishness too with the AAII coming in with 49% bullish and 35% bearish. So the newsletter writers and the crowd are bullish. The best bottoms come when the bears are beating the bulls by a wide margin.

Now I will recognize that earlier in the year bears were destroying the bulls in the poll. But during that time we had no hint of an actual bottom in the form of either a capitulation day with huge volume, a rally on heavy accumulation after a low volume selloff, or with leading stocks setting up and breaking out leading the overall market. With all of these conditions, combined with the fact that the McClellan hit the highest level I have ever seen on the oscillator on my Telechart system. And my data goes back to 1986. So seeing the McClellan oscillator this overbought and seeing how poor this rally has been so far should have a lot of people concerned that this "Santa rally" might come to an end.

To top all the poor charts and lame volume on the indexes, we are still dealing with load after load of very bad news item. Heck, now we know SAY was a scam company. When they opened the Bernie Madoff can of worms you knew there were more cockroaches under the sink.

This market is still one tricky beast with the short term trend and sub-intermediate term trend up and the long-term and intermediate trend down. That means that the longs we take must have profits taken quickly (unless they are up 20% in a few weeks--then we hold longer) and must keep the longs small until we get an uptrend on strong volume.

At the same time, we must continue to look for long term topping patterns in stocks that have broken down and now have rallied back to their 50 and 200 day moving averages on low volume. If they can fail and crack there at those lines then maybe we can make some great money again on the short side.

The one thing remains the same and I believe I have been saying it for OVER a year now. That is that CASH IS KING! What does that mean? It simply means that when the market is in a series of mixed uptrends and downtrends and more of your recent longs/shorts fail normal. How do you stop that? You can't. You can only wait for the perfect long setup to come and then go heavily long. Until then, it would be foolish to put any significant play in any stock right now. Nothing is perfect and the few that start to look perfect quickly lose that gusto. if you go 400% long in a raging bull market where IBD leading stocks are leading, you are definitely going to be VERY WEALTHY at the end of a bull market. When IBD stocks are not leading, you do not have pretty chart patterns, and the indexes are rallying on low volume you have a perfect mix for a big possible nasty surprise.

So I can't stress it enough: CASH IS STILL KING. You can play the short side when the setups are similar to the recent shorts that we have taken that are working but even then I think we need to work on a little bit more of back and filling before these short setups look really ripe.

I am going to go ahead and wrap up the commentary there as it has been a very long day as the Platinum chat room is starting to get real active along with the Gold members in the forums. I LOVE IT but that means everyone that reads the free commentary will sometimes have to wait for the morning to get all the information. I apologize and will continue to make efforts to get everything done before 10pm EST. It is just really hard to do with my active lifestyle and heavy demands by the Platinum and Gold members (which I love). Also putting in my orders is another priority over this free commentary. Still I always get those videos done on time. Some days are better than others but at least you are getting the TRUTH unlike Madoff investors.

top short holdings with total returns UP today: RDK 15% MOS 55% LLL 18% POT 48% AAPL 43% CYT 55% SBAC 42% CASY 22% OKE 31% CPRT 22% APD 38% SDA 73% AMX 40% SPG 39% GGB 50% CEDC 57% CETV 75% CEO 22% IPHS 19% SPW 61% TITN 39%


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