Stocks Fall Hard But Find Support Around Mid-Day; Lower Volume Prevents Another Distribution Day.

January 22, 2007

Stocks started the day off rough and only got worse as the LEI was delayed. The delay helped the selloff pick up steam and stocks quickly dropped to their low’s on the day. However, like usual, buyers stepped in to help support a declining market. However, by the close, their buying could not prop the indexes back into positive ground.

At the close, the SP 600 fell .9%, the Nasdaq dropped .8% falling below its 50 dma, the DJIA fell .7%, and the SP 500 did the best only falling .5%. Leading stocks fared worse, with the IBD 85-85 falling 1.1%.

Volume came in slightly lower on both the NYSE and the Nasdaq, putting a positive spin on the selling. Higher volume would have given another clear distribution day. However, the lower volume shows that the big boys were not falling over each other to get out of their holdings.

Breadth was negative on both exchanges; on the Nasdaq decliners beat advancers by a 2-to-1 ratio and on the NYSE decliners beat advancers by a 5-to-3 ratio.

The good news from today is that volume was lower. The bad news is that stocks went down. I am not sure that is bad news in the larger scheme of things as it is very healthy to pullback in a strong market so you can gather momentum for another run.

Constantly going up everyday sets us up for a big quick pullback. Those are the kind of pullbacks that can break market careers as traders can not handle the emotional toll a one day price decline can do to wipe out months of gains.

The good news is that there are not that many AXR type stocks out there in comparison to the gains we have seen since the rally started in August. However, as each day has gone by the past week, I have added fewer longs and sold off more positions than I have at any time during the rally.

This is the first week of the rally where I have found very few nice looking charts but have had plenty of stocks give clear sell signals via climax runs, breaking of support, or just wild price and volume movements that should not be tolerated in a good long.

But with all of this I am obviously still long as many stocks continue to form, breakout, and move higher from beautiful consolidation patterns. The only problem is the new buys are failing; they were not doing that the past five plus months. Now they are.

As I have talked about all last week and even before that, this market is very late in its overall cycle of bull markets. IBD even made mention of it today and they brought up key points that I have not made about historical market cycles.

This is what was posted in the Big Picture: A look at the bigger picture shows the market in a long-term uptrend. Wall Street has been in a confirmed bull market for nearly four years; it’s been in an overall uptrend since hitting bottom in October 2002, 51 months ago. That rates as one of the longest positive market trends in history, ranking near the run-ups of the booming 1920s, 1950s and 1990s.

This is very important to consider, if you are making new buys. You are late late late. Where were you in 2003? Where were you in October 05? Where were you when I was one of a VERY FEW market commentators buying stocks off the July/August lows last year? If you were not buying stocks then and are buying stocks now, don’t come bitching to me that you are losing money. Uhm, guess what? I am too. You are supposed to when you are long in a market that is not going up. The question is how much are you up compared to how much you are losing now? For me that is the most important question. I am up a good amount off the lows and have NO PROBLEM giving up some gains to MAKE SURE that the top is in.

God knows the last thing I want to do is be like the rest of the lemmings that sell a stock simply because the market is selling off and they got scared. Trading emotionally is very stupid and will kill EVERY trader. This is, once again, why I don’t watch my stocks intraday. In bull markets they will breakdown and come back so often it will make you sick.

I know a trader who lost his position in PSPT that way. This is how I lost my position in OMRI. Stupid emotional trading. That is for the weak. I am not the weak. Emotions have no business in this market. Only discipline, preparation, and execution will make you sound money consistently year in and year out.

It is not time to sell stocks yet. There are simply too many stocks with beautiful chart patterns that are moving up. Until we get a couple more distribution days and I clearly see the Nasdaq fail here I am not going to short.

History OVER AND OVER tells us the best time to short is AFTER the market has already CLEARLY topped. Anticipation will kill most short sellers, like it has every selloff since the market took off in 2003.

Here are some signs of weakening if leading stocks are any indication of the overall market. AXR huge ugly reversal–you don’t see that in bull markets. AAPL breakout to new highs quickly followed by a reversal on heavy volume after announcing great earnings–you don’t see that in bull markets. This refers to the start of a bull market. This is the type of action you see at the end of an uptrend.

There are a TON of earnings this week and if they keep coming in the way they are it is going to be the worst reporting period since 2002. Tons of stocks are giving very weak guidance; estimates are being lowered all over the place.

Stay disciplined, cut losers fast, if your stock does not go up immediately after you buy it sell 1/2, and make sure you ONLY buy quality in this kind of market environment if you must go long right now. I am still taking what my scans give me and as you can see they are not giving me much.

THAT IS ABOUT A CLEAR SIGNAL AS ANY THAT THIS IS NOT THE BEST MARKET TO BE INVESTING IN. IF THIS WAS A NORMAL PULLBACK PLENTY OF STOCKS WOULD BE SHOWING UP ON MY SCANS AS NEW POSSIBLE LONGS. THEY ARE NOT SHOWING UP YET AND MIGHT NOT.

We shall see what the full plate of earnings brings us tomorrow and the rest of the week. I will be standing on the sidelines, making small buys, and carefully managing my portfolio until the market can clear up a bit.

Aloha and I will see you in the Chat Room!