Thursday, May 07, 2009

A Very Nasty Reversal Hits Stocks With Volume Higher Across The Board; Today Was The First Time Both Indexes Fell Hard On Volume Since The March Rally

I have not done commentary for a while because things were pretty steady there for us since the March lows. Basically all that we have had to do was just manage our longs and our profits as those longs gave them to us. However, what happened on Thursday was a little different than what we have seen before on previous selloffs.

On previous selloffs that we have had, we have either had one or the other index selloff on heavy volume or when the indexes sold off it was on pretty light volume. Thursday, however, came on heavy volume for both indexes. Not only that but stocks like TSYS, SWHC, and NFLX are just some of the examples of how leading stocks were treated on Thursday.

Now, do not get me wrong, we still have a lot of solid charts out there that tell us to stay pat and not get too spooked on this one selloff. However, at the same time, I must say that I have not seen a pullback during this previous uptrend that has given us as much reason for concern as this one has. Just the fact that leading stocks and my best looking stocks had such a poor day tells me that today was just not a weak day for lagging stocks. It was a weak day for all stocks.

The biggest problem in this rally, for me personally, has been the lack of max-green BOP filled charts with wonderful price/volume action. With that, at the same time, leading stock have lagged the ENTIRE rally. If you go back to November, when some indexes bottomed, you can see that the IBD 100 and IBD 8585 continued to selloff into the March lows.

When we finally hit the March lows and the Nasdaq and SP 600 hit recent lows and ran hard (up around 45% for both indexes) the IBD 100 and IBD 8585 did not lead at all. Sure, there might have been a day or two but a day or two does not a rally make. If this rally was for real, you would be able to take one look at the IBD 100 and IBD 8585 and go "yep, those indexes sure are stronger than the overall market." This would appear with a RS line that was in an uptrend off the lows (not a downtrend like this is) and an IBD100 and IBD8585 index in a steeper uptrend. Instead these indexes uptrend has been very much sideways.

Now with today's selloff added to the recent stall the past couple of days on these indexes and NOW it appears that the indexes are rolling over. If that is the case, I still have 20 shorts and am ready to add to those gains and pick up more shorts while getting rid of my longs. But I have to admit it would be nice to keep my 25 longs and get rid of the remaining shorts. Either way, it doesn't really matter because these positions still make up a very short amount of my portfolio.

Well, if I don't have a lot of longs and I don't have a lot of shorts, what do I have a lot of? That's easy at these levels: cash! Cash is still the asset I hold the most of because all during the rally I waited and waited and waited and waited for my max green BOP charts to build with TIGHT bases. At the same time, I waited for high quality CANSLIM longs to setup and breakout of proper basing patterns that were high quality. We did run into some of those and more worked than did not. However, the few that worked did not put in a ton of "impressive" gains. Instead small gains and maybe a 20% here and there and we call ourselves lucky. That sure is a LOT less than we used to get in previous uptrends.

Maybe we got too many bulls too quickly. Last week, in the middle of the rally, we were comforted by knowing that bulls beat bears on the AAII poll and on the Investors Intelligence poll (36% bulls to 37.2% bears). However, this week, the Investors Intelligence poll shows 40% bulls and 35% bears which shows that some are starting to embrace this bounce. Not only is this embrace not wise by some but it is dangerous. Some are getting long without any resolve to where they are going to cut their lost. The good news about BigWave investing is that if you have a gain you let it ride...unless it took too long to get the 20% gain at first...and if you have a loss you get wrong of it quickly.

Stay patient, stay flexible with a bias to both longs and shorts but mainly to cash, and remember this too shall pass and we will have a market that rewards patient and smart investors. Remember, Jesse Livermore clearly stated that the big money was made only ONE WAY for him: in his sitting. It was never his trading that made him the BIG money he said. It was ALWAYS his sitting. Sitting during a big uptrend (like TASR in 03 or LMLP in 99) on the long side, sitting in a big downtrend (like CETV and CEDC 2008) on the short side, and sitting on cash when the market was in no trend whatsoever other than a painful chop for those forced to be long or shorts. Aloha and GREAT LUCK!! :)

--Joshua Hayes, CEO BigWaveTrading Capital Management


No comments: