Another Dead-Cat Lower Volume Rally Give Stocks A Green Close; I Don’t Trust This Market

March 12, 2007

Stocks kept on bouncing, on Monday, as a flurry of merger and acquisition news and lower oil helped stocks finish higher, despite further bad news from the subprime loan sector. Before the bell, news that DG was being bought out by a private equity group, UNH was buying SIE, and SGP was buying AKZOY hit the market. However, the NYSE halted trading on NEW as NEW said it will not be able to pay back some HUGE loans (NEW fell 48% overnight). This had much more of a morning impact on stocks than any of the merger news, as the market opened flat. But as the day went on traders covered some shorts helping start a low volume rally that was met with a little bit of selling at the end. Oil falling below $60 to $58.91, for the first time in three weeks, was the reason given for the markets afternoon rally. However, the lower volume afternoon rally with a last hour pullback (AGAIN) leaves much to the imagination.

At the close, the Nasdaq led the way with a .6% gain, the SP 600 followed with a .4% gain, and the NYSE, SP 500, and DJIA finished .3% higher. The good news is that the IBD 85-85 and IBD 100 outperformed to the upside with a 1% gain. This was the fifth day in a row of outperformance. But the past five days outperformance was nothing compared to how much these leading indexes led to the downside. It simply pales in comparison.

Volume was lower on the Nasdaq by quite a bit. It was so much lower that we have not seen volume that low since December 29. That was inbetween Christmas and New Years, which is normally a natural slow period. The reason why volume was so low today can only be blamed on the institutions not showing up. When they don’t bid stocks higher, it usually means the dumb money is pushing stocks up. That is not bullish. NYSE volume was a tad bit higher but still well below the 50 day volume average. That is clear evidence that the big boys are not buying this rally.

Breadth was positive on both exchanges with advancers beating decliners by a 5-to-3 margin on the NYSE and by a 9-to-7 margin on the Nasdaq. There were 164 new highs to 88 new lows. This is not bearish but it is not bullish either as new lows are still well above what they were a month ago. New highs also are no where near the point that they once were last month.

The biggest standout of the day, in my opinion, was the Homebuilding stocks. This sector got whacked today, with the XHB/AMEX Housing index falling 2.3%. Every stock in this group has put in a clear top almost nine months ago and have been in constant steady downtrends since. Only now are the EPS and sales starting to show that slowdown. Proving, once again, that TA always gives you sell signals before the fundamentals do. The chart is always ahead of the fundamentals, in most cases. The stocks in this group are either failing at the 200 dma (HOV MDC), breaking down through the 200 dma (LEN DHI KBH TOL), failing at key resistance (CTX), or falling right through strong support (PHM SPF MTH DHI-again BZH).

The other standout is NEW. NEW collapsing is evidence number 1,000,000 that buying falling stocks is purely gambling and a game for idiots and history-deficient gambling traders. The morons who tried to bottom fish this got exactly what they deserved for not learning from history that YOU NEVER catch a falling knife. NEW is down 96% plus since just this February. And you want to be long that? I know at least 10 daytraders who got F***** today hard by trying to guess the bottom of NEW. They snatched up these “cheap” shares and got the reward they deserve for playing that game: a one way ticket to the poor house. If only they would have paid some money to learn from traders that knew better than to do something this stupid. The Finance-Mortgage & Related group fell 2.8%, continuing the losses that have been nailing this sector for weeks now. I don’t care what anyone says I love watching people get their ASS handed to them when they fail to follow history and the rules history has clearly laid out for successful traders to follow. Greedy people and gamblers always get what they deserve. In my eleven years plus doing this, I still enjoy watching these morons blow up.

Today was day five of the attempted rally from the lows. I still clearly see this rally failing. There is NOTHING that makes me think this rally will have any real legs that produce any winners any time soon. The oversold rally, however, still has much longer to go, imo. We have not sucked in enough bottom fishing bulls who blindly follow the CNBC talking heads BS that this selloff was a one time great buying opportunity. These people who do not follow chart patterns will eventually suffer the wrath of the market which does not care what the talking fools on CNBC have to say. The dumb money is still not done buying. Did you see the put/call equity ratio? It fell to .66. That is the kind of complacency we need to see to actually have this rally fail. The high put/call was helping this rally hold up. But no more can a high put/cal be used as an excuse for the oversold rally to last. The fact is the dumb money has decided the selloff was just a one time event.

The only people I know that are making consistent money in this market the past two months have been daytraders of the solar stocks. Last month I mentioned that if I was daytrading these would be the stocks I would daytrade as they have that intraday movement and following that is needed for good daytrading stocks. However, these stocks continue to be wild, sloppy, and V shaped on daily charts, making for horrible swing longs. Daytraders, for the first time since October 2002, look like the smart crowd. They only look smart as the daytrading market will eventually give way to a real hard downtrending market and then a good rally for active investors to go back to making big money on. The big money is made in the holding, not the acting. Daytraders NEVER outgain CANSLIM investors in the long run. Only in the short term, like now, do they actually make CANSLIM investing look silly.

This low volume rally still looks good for some more BS gains that will, of course, suck in more dumb and impatient investors thinking they have bargains. However, the CNBC cheerleaders that are leading them to this conclusion are only helping to work off the oversold condition. Once that condition is worked off, you better hope I have a lot more beautiful green charts with beautiful basing patterns. Or else we are going lower. The typical chart patterns I see now are ugly, V shaped, high volume basing moves that lead to topping patterns that lead to short patterns eventually.

Impatience and ignorance will kill you right here. Don’t go thinking that you are smarter than the stock market. Trust me, you nor I, are not. We are both POWERLESS to what it wants to do. Never fight the trend and never invest in a crazy market like we have now. Hold your winners, cut your losers, and keep new buys very small unless they are perfect CANSLIM candidates.

Aloha and I will see you in the chat room.