The Tip-Off I Refered To On Wednesday Had Its Follow-Through On Friday

February 10, 2007

It is kind of odd that a comments from the St. Louis Fed head William Poole, Cleveland Fed head Sandra Pianalto, and Dallas Fed head Richard Fisher could kick start a selloff like it did today, but that is in fact what happened. Stocks started off strong but his comments that he would vote for a hike if inflation stays above 2% was not what wall street was looking for. The momentum of the market took a turn on Wednesday and those comments, along with MU announcing price declines, sent stocks falling across the board with leading stocks in leading sectors getting hit hard.

At the close, the Nassy led to the downside with a 1.16% loss, the SP 600 lost 1.03%, the SP 500 took a .71% hit, and the DJIA fell .45%. The bad news, without a doubt, came from leading stocks. The IBD 100 index got hit with a 1.8% loss. Not good.

Volume was higher on the NYSE and significantly higher on the Nasdaq. This volume and price action gives both indexes a clear distribution day. Thus making it three distribution days in the past four weeks. Caution flags are rising.

Breadth was negative on both exchanges by a good margin. Decliners beat advancers by a 12-to-5 margin on the NYSE and by a 2-to-1 margin on the Nasdaq. This price, volume, and breadth action is a major change from the prevailing trend.

For the week, Friday’s reversal took care of a full week of small gains, with the SP 600 ending down .5%, the DJIA and Nassy down .6%, and the SP 500 down .7%. The IBD 100 did manage to hold up the best, only losing .4%. Small comfort, considering how much and broad the selling was on Friday.

There were a bunch of reasons for the market to fall today. A lot of traders blamed the Fed, some blamed oil rising to near $60, some blamed MU, some blamed semiconductor stocks as the SOX index fell 1.4% today. But bottom line all of that was just noise compared to the fact that the big boys were selling stocks. That is why volume was higher; that is why prices were down over .5%. The big boys think stocks are expensive here and are selling. That is why a lot of the hot momo stocks got crushed today; that is why the seven out of the 10 worst sectors today were in the top 20 sectors based on six-month price performance.

The hits today in the Steel, Internet, Media, Leisure, and Building groups that were leading this market were broad and large. Leading sectors getting hit left and right across the board on a weak market day after such a nice uptrend is a MAJOR red flag for me. After such incredible gains as we have seen, to see all of those leading sectors get smacked is a big warning sign that the momentum may be about to end for this market uptrend. This is short term analysis remember. No one knows what will happen three, six, or twelve months from now, even if they say they do.

Some other clear danger signs comes in the form of Gold stocks showing up on my scans again, 26 out of the 30 DJ stocks being down, Financial indexes getting hit around 1% all around, stocks like AAPL SNDK XMSR GOOG NYX which are big big stocks w/ momentum bias getting hit, and the worst individual action seen today in MA. MA KILLED earnings and sales. They destroyed estimates and raised and crushed YOY earnings. However, thanks to charts, we can clearly see that all the news was taken in and priced in BEFORE the actual news happened. So how did the stock react? It sold off almost 10% on HUGE trade–no surprise at all to me and investors/readers of this site. Even if you didn’t sell any MA before today’s crash, you are still walking away with a 110% plus gain since the 8/2/06 buy. But action like that off of that amazing of earnings is a sign of a supply heavy market.

But with those danger signs we must look at the positive. That can be seen in the shares of FIG. FIG is a hedge-fund IPO that priced today at $18.50. By the time all was said and done, the stock closed at $31. This shows that the IPO market is not dead and speculation is definitely not dead. However, this really isn’t a speculative stock. Just like NYX which doubled on its IPO from its opening, this stock has real growth. EPS has grown between 338-459% the past four quarters, with sales growing at 470 to 111% during the same time. So this stock did have reason to run.

Today’s losses were real, without a doubt. Traders can try to use the excuse that big money did not want to be invested over the weekend. But that excuse has worn out its welcome with me and is a crock of crap. Volume does not rise on Friday, if traders are exiting the building. Trust me, the big boys stayed and sold. And in the final hour they bid up their favorite stocks to make it look like real support. In fact, that bounce looked pathetic. This market is definitely ready for a short-term correction.

I am still very long and I see nothing to worry about yet. This is just another major warning sign that is signaling to us that the incredible gains we have seen since July/Aug lows might be coming to an end. However, until all my stocks break uptrends on large volume, I am not going to panic and go 100%. I will wait for the market to tell me when to do that. Readers of the gold site have seen me taking lots of prices on stocks making big one day moves. Taking profits on the way up is not only a smart thing to do, it is what all the greatest traders did. However, I let the market tell me when to COMPLETELY sell out. But by then I will have sold plenty near the top.

I still don’t think we are near that ultimate top but in the short-term I recommend raising some partial stops, raising cash by selling complete laggards, and keep all new buys to only the best CANSLIM stocks breaking out of very tight and well formed bases. If the market blast off into new highs, then obviously this caution can be replaced by normal long buying patterns in bullish uptrending market. However, for now, caution is the best game plan.

Well, I guess I am glad I went to Hana on Friday, instead of listening and witnessing panic amongst amateur traders. Sheesh, the chat rooms that I monitor. Horrible! Horrible ! Horrible! This shows me that for the short-term the best thing is for stocks to go down. The level of euphoria amongst bulls in calling for everyone to buy this pullback this time is out of control. Maybe they are right but for some odd reason I think this time they are wrong. Why? Because I simply have not seen that kind of buy this pullback calls as I reviewed on Friday. At the same time, however, those bears sure are convinced this time is the right time. Both are probably wrong and right.

The Tip-Off I Refered To On Wednesday Had Its Follow-Through On Friday

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