The Largest Rallies Come In Bear Markets; Stocks Stage Huge Rally On Slightly Higher Volume Marking Day Two Of Rally Attempt
November 28, 2007
Today’s gains were extremely impressive, as stock indexes rallied between 2.6% and 3.3%, with the SP 600 leading the way. However, if we just get over the headlines of the market rallying over 3%, and we get down to some internals, we can see that today’s rally just might not be the start of a new bull market. Now, I know that might sound silly, especially since all you heard all day long that the market bottomed. But something tells me that this market might not be done on the downside. That something is history.
The first thing I look for, any time the market puts in a huge rally, in a bearish market environment or in a pullback from bull market highs, is if the volume was heavy. Higher volume than the day before is always important as it is the first sign of accumulation from large institutions. However, just having higher volume than the previous day’s volume is not the end all of all.
The second thing to look for to see how strong the volume is is the relationship of the volume to the 50 day volume average. When the market is up a lot, like it was today, for me to get bullish and not believe it is just a massive short-squeeze I have to see a major jump in volume. If you look at the NYSE and the Nasdaq, you will see that the volume was over the 50 dva but it was barely higher. Compare the volume today to the volume in late July to mid August. The volume that we saw on the downside was much heavier than what we are seeing right now. If that was not the case, the Acc/Dis ratings in the Nasdaq would not still be a C. Now on the SP 500 and the NYSE the Acc/Dis rating has turned into a B but the leading stocks IBD 100 is still very weak with a D.
The most important thing to take away here is to make sure that you can clearly see that the volume today and yesterday was very weak compared to the distribution that the indexes suffered on the way down. If you see that, then you are doing yourself a huge justice by taking the time to see the facts instead of just rallying around the hype the talking faces on CNBC produce. What is most amazing is that many professional stock market investors/traders do not use charts and pretty much think they are nothing but a bunch of squiggly lines that mean nothing. Sad, but true. And it definitely helps us.
So when I take a look at the volume on this rally I see almost nothing that tells me that large funds were stepping all over each other in an effort to buy the bargains. When stocks bottom, there are not only big price gains but there is huge volume that comes along day after day of the rally. Today was day two of the rally attempt, with day one starting yesterday.
The problem with day one was that volume was very small also. Combining the lack of huge volume yesterday with today’s weak volume and you really have a rally that so far has the feeling of being only an oversold short-squeezing rally. The fact that we are on day two of a rally attempt does mean that we need to keep our eyes out for a follow-through day soon.
After a rally attempt starts (yesterday), the stock market will put in a large rally (usually between 1% and 2%; I prefer 1.5% at least) on heavier volume than the day before, in between day four and day ten. This move is called a follow-through day and is very important. Why is it important? Because no major stock market rally has EVER started without a follow-through day. However, you must remember that not every follow-through day launches a long bull market.
I remember many times after the 2000 top to the 2002 lows where the market rallied for a short while after a follow-through day to just rollover to new lows. So while we are leaning to the short side still, you must remember to not lose your whole short position if you are in a very weak stock as the markets go through these short-squeeze rallies. Some of the ones I remember off the top of my head that you should review are the April 2000-August 2000 “FOR SURE BOTTOM RALLY.” I will never forget that when that happened EVERYONE said we bottomed and stocks were going higher. When the market started to rally in April everyone was for sure we saw the worst of the selling; just like now. However, possibly just like now, we were just starting.
Other times that we had fakeout rallies were in Jan 01-Feb 01, late Sept 01-Jan 02, and in August 2002 right before the rollover to the real bottom in October 2002. By that time, nobody liked the market, everyone was for sure the US financial system was going to forever to be destroyed, and the sentiment was so bad that nobody wanted to buy stocks. Right now, it looks like everyone and their mom is calling for a bottom here and that everyone is telling me what I should buy in preparation for attacks on the old highs. Folks, we don’t bottom when everyone is telling you to buy stocks.
Another problem was just mentioned and has been talked about constantly here for a while is sentiment. Just today I heard a guest on CNBC make one of the most absurd statements I have heard in a long time. He had the gull to say that a couple of weeks ago we saw sentiment get the most negative it has been in years warning of a bottom soon. When I heard this, I was stunned and immediately stopped doing what I was doing to hear what he was going to refer to to confirm this statement. Of course, nothing was mentioned. He did not point to a single indicator, survey, chart, or study to confirm “this most negative sentiment in years” comment.
The truth is we haven’t come close to seeing any fear at all. On August 16th intraday Chris (mahket) and me almost called the lows to the exact hour. Since then we were bullish all the way up to the November highs and as the market rallied there were plenty of stocks that produced solid gains for our portfolios. There was nothing amazing or incredible but there were still some solid gains to be made.
That reversal call was not anything special it was made based on the fact that the VIX hit a level we have not seen in over four years and not only did it hit that level it hit it and put in a huge intraday reversal and on an arithmetic chart looked clearly toppy. At the same time, the put/call hit over 1.3 (clearly a level showing fear) and the bulls hit 40% and the bears hit 39% almost crossing pretty much confirming a bottom. This along with all the hot charts moving higher made it clear the rally was good.
Right now, not a whole lot of that exist. Not only are there very few to none charts that are hot hot hot in high quality CANSLIM growth names, there is no fear down here at these lows. If this is a normal pullback from the August lows, then this makes sense. But if the SP 600 and Russell 2000 indexes are the leading indexes and are leading the market lower then we have a problem. Both are below the August lows by a good amount, yet the put/call, VIX, or investors intelligence survey are not even close to the August lows. If the NYSE is the leading index, then I am incorrect for using the leading indexes on the way up as the leaders now on the way down, and the market is just in a normal pullback in a bullish trend set back in August. Something tells me that isn’t the case, though.
So, going back to the guy, I find it insulting to intelligent investors that this hedge fund manager of two funds was saying such crap. It is these kind of lies that hurt the investing public and is part of the reason why people like me and RevShark exist. We can’t stand to hear and see this crap and, I am not sure about him but, it really bothers me that this stuff can be said and nobody says anything to counter it. It isn’t the anchors fault; there is no way whoever interviewed him knew any better.
Now, moving away from the sentiment that is not negative out there-or else people would not be saying to buy this dip-there is one other area of the market that can tell us how strong the market is underneath. That area is all of my charts. The first thing that struck me when I went over my longs and shorts scans that I have created I noticed that a lot of shorts did fail key resistance which is quite shocking because the setups were so close to perfect. The second thing was that in the CANSLIM watchlist there were a ton of top stocks breaking out to new highs or bouncing off key moving averages. And the third thing was that there was almost no volume on any of these moves.
All of these breakouts/bounces from strong support or through key resistance all happened in stocks that have “jacked up” charts. There are very few charts out there that are loaded with green BOP much less max green BOP. The stocks that do exist in these BOP scans are either under $10 a share showing that the stock is of low quality or it trades under 10,000 shares a day showing that the company is so small that there is no float much less interest from big investors. Take these very weak HOT charts with green to max green BOP and then take all the yellow to red BOP filled CANSLIM charts that are breaking out or bouncing on low to very low volume and compare them to all the stocks over $50 that are high quality that are selling off and it becomes clear the stocks that are moving lower are of very high quality and the stocks moving higher are of very low quality.
In raging bull markets when you are supposed to be maxed out on margin on the long side, you will have BIDU AAPL GRMN GOOG leading you higher while there are few to no stocks selling off. That is what we had from the October 2002 lows to the November highs. And actually we might have BIDU AAPL GRMN GOOG and the other horseman make new highs again. However, this time, if they do that, they will have extremely poor negative divergences in a TON of technical indicators and they will also have very wedging price patterns setting them up for lower prices down the road. There is no other way to put it, when I look at my charts, things have changed. There is no way I can see a bottom here so soon after the real selling started.
Am I enough of an ass to deny the rally? Of course not!! I need to make one thing clear: though I might have an overall bearish bent to me since the November highs, I am still more than willing to play ANY hot chart that comes up. That is why I went long EGN quite large yesterday. Today’s gains made up for ALL of my losses in the shorts, because the long was so well setup that the risk/reward was darn near perfect. ELMG is now looking great too. But one thing is similar here also: neither chart is perfect. I have no perfect charts STILL. However, they are definitely nice enough to cause me to take them.
Also there are six new longs tonight. If I was a true perma-bear without any brains like some people I know, I wouldn’t be going long six stocks. Are any of them worth loading up on? Not to me. I don’t see anything here. ANSR’s chart is what I would love most stocks to look like during their month of November. However, a sub $5 price is not what I like to see. I like my gems to trade $20 or higher. Thanks to the low price, by default, the best chart tonight becomes EGN again.
OK, I believe I have given you enough info to digest on tonight. Remember, it is not wise to be a hardcore bear or bull here. Stay flexible. Play the short side, play the long side, but do not marry anything. There are no perfect charts and if you short late in a bear market these rallies like you saw today will kill.
Also, don’t forget the biggest rallies happen in bear markets. Our biggest day this year was earlier this month. Did we hold those gains? Exactly. Did you know that the best nine days for the Nasdaq ALL happened during the bear market of 2000-2002? You didn’t? I did.
Aloha and I will see you in the chat room!! ALOHA!!!
Last 5 posts in Free Commentary
- There Sure Is A Lot Bullishness Out There After Today's Huge Lame Bounce; Real Bottoms Come With Volume, Unlike What Cramer Tells You (How Often Is He Wrong?) - March 18th, 2008
- DJIA Leads The Way As BSC Rocks The Stock Market On Mixed Volume; How Can This Be A Bottom Without A HUGE Surge In Volume On the Nasdaq And NYSE? It Can't Be! - March 17th, 2008
- BSC Blowup Proves A Chronic Emailer Wrong And, Once Again, Proves The Power Of CANSLIM; Stock Market Indexes Selloff On Mixed Volume But Hold Recent Lows - March 14th, 2008
- Incredible Fed-Induced Rally Ends With Stock Indexes Closing At The HOD On Higher Volume; Remember, The Most Powerful Rallies Always Come In Bear Markets - March 11th, 2008
- Stocks Selloff On Higher Volume, Helping Send Some Indexes To New 52-Week Closing Lows - March 7th, 2008
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Many of the CNBC folks attributed today’s rally to a comment by a fed governor that they may cut rates again in December.
I hear some folks say “Don’t fight the fed†What is your assessment of the current chatter regarding the expected fed rate cut and how it may affect the future bull/bear trend?
We simply do not listen to the chatter! Plain and simple. It is all noise, let your charts speak to you!
As a newcomer to this site and a recent convert to CANSLIM, I am intrigued about the apparent mismatch between the “chatter” - (what people say) vs the charts which reflects what they actually do. The FED does seem to drive both chatter and charts - and my question better phrased is - Does the FED have the power to stop an impending Bear market? or are the forces that drive the charts into a Bear too powerful to overcome with any FED action?
FED only controls money supply, doesn’t control how well the market will do or won’t do. Correlation isn’t that great!
Check out MauiTrader’s recent response to a similar question:
http://www.bigwavetrading.com/2007/11/14/the-biggest-rallies-happen-in-bear-markets-stocks-have-best-day-in-years-on-lower-volume/#more-843
yeah, the most important thing to do is follow the charts and if we do that we are now officially in a “confirmed rally” and looking for shorts here are wrong. Most of the leading stocks are moving higher again BUT THIS TIME THEY ARE DOING IT ON LAME VOLUME. The chances that they will fail are very high but with a lot of nice CANSLIM quality stocks now moving higher, chances are this market is going to rally some more before we make any more lower moves.
Fed does not drive charts, PERIOD!! Mutual, pension, insurance, and hedge funds control 75% of the market. They are the elephants. They are the ones that we follow. NOT THE FED.
The Fed can’t stop anything. If they pump liquidity into the market it doesn’t matter, if the big boys are selling and selling hard. Do you think they could have stopped 1929-1932? Or 2000-20002? They won’t be able to stop this one, once it actually gets moving, either.
Did you cover the (small) short positions you established (I think) in AMZN and GOOG? Thanks again.
Sorry, caught your commentary in the New Shorts section. Thanks.
oh yeah, amzn and goog. you better believe i did. this is obviously not the right time to short so i admit i am wrong with the leaders and got rid of them. i would assume the way the ta indicators are pointing that the next highs would be the possible last rally for them and then make good shorts. but who knows? these uptrends are lasting much longer than anything i have seen. some stocks are completely ignoring everything ta 101 teaches you.