Nasty Selloff On Higher Volume Gives All Indexes A Clear Distribution Day; Time To Raise Cash, Cut Laggards, And Hold Off On New Buys

July 24, 2007

Today was not a good day but by no means does it look like the sky is about to fall. I have a lot of charts still looking very strong. Saying that I am cutting my laggards and taking some profits across the board in case things do get worse. I have no problem switching sides, as you can see that I have been posting short recommendations constantly the past month plus. Those shorts are really making some big gains and are obviously doing much better than recent longs. That is as clear as sign as any that this market is getting weak on the short term. The expanding new lows on every rally in the index was the tip off. Today there were 561 new 52-week lows to 139 new 52-week highs. Better safe than sorry. Nobody EVER went broke cutting losses short and taking profits when the market started to look weak.

Of course, with all these warnings, we always get reminded how fearful it can get. And today the panic was quite high with the put/call ratio closing at 1.16. This is extremely high and at levels not seen since Feb/March. Also at a very extreme level was the decliners to advancers by a 5-to-1 margin on the Nasdaq and by an incredible outrageous 9-to-1 on the NYSE. This seems a bit extreme and I find it hard to believe that it can get horribly worse from here in the short term.

I mean, seriously, do you know how many crash calls I saw today in the rooms I monitor? It was nuts. EVERYONE was calling for a crash and a top. Folks, I will remind you, once again–and I do acknowledge that I could be wrong–that tops do not happen when the crowd is calling tops and bearish. Tops happen when the crowd is euphoric and they believe every dip is a chance to buy. This selloff already has EVERYONE calling a top.

And if you look at only the housing, finance, and real estate stocks, then yes, things are ugly. But if you look at the stocks in my portfolios you will see a different story. Many of these stocks made normal pullbacks on lower volume. Many did need to have some shaved off. But the fact that they did not all fall out of bed shows that there is still strength in this market.

That strength can be seen by one of my longs in my personal and public portfolio of AMZN. Shares exploded after-hours up around 18% on EPS growth of 280% and sales growth of 35%. This stock, with a ROE of 56%, is in fact one of the leaders. When leading stocks act like this, it is hard to call a top. However, in saying that I am starting to see some weakness in many of my high priced leading stocks (TNH GOOG AAPL). So you it appears to be a mixed market at best.

One of the key tells that we have to be careful here, also, is that the IBD 100 fell 3.7%. That along with my account suffering a bit of a haircut (oddly not as bad as it could have been–3.9%) is enough reason to be cautious.

I agree completely with what IBD posted in its big picture tonight:

That doesn’t mean sell blindly. Rather, it’s an opportunity to take stock of your portfolio. First, cut your losses short. Then, if you own a stock that’s up 10% or 15% but didn’t stage a big 20% surge in the first three weeks after you bought it, consider taking profits. When the market turns choppy, you want to focus on your highest-quality stocks.

Please read the little notes I put in the shorts and longs section with tonights daily postings. That will shed a little bit of extra insight into the current situation. And if you have not read “the big picture” yet in IBD, please read that before the trading day begins. Also if you have a subscription to realmoney.com, I would read some of the columnist conversation, for fun. It is amazing how emotional these “professionals” get in a moving market. At least one contributor can be counted on to be consistent with simple technical analysis-and that is, of course, James DePorre. I would read his daily postings, if I were you. I know it is part of my daily routine, even though I do feel as I have a superior record to him this year and to be honest many years counting before this year. I can tell you this, folks, I am trying my best to become a contributor to realmoney.com. I believe they need a new “chartman” like GBS was. And I would love to bring back that kind of style.

If anyone wants to help me become a contributor to either marketwatch or realmoney.com, feel free to send their editors an email. I normally do not like asking for outside help, but if you are sick of the crap you are reading in those daily articles and would like a more refreshing simple approached TA style that GBS had when he wrote, let them know. I read ALL those TA articles on realmoney.com and simply find their approach inferior. But they are more experienced and don’t live on an island so they have a leg up on me.

Nasty Selloff On Higher Volume Gives All Indexes A Clear Distribution Day; Time To Raise Cash, Cut Laggards, And Hold Off On New Buys

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